Are banks equipped to replace 2,300 crore pieces of Rs 500 and Rs 1,000 notes?

The people who would be really hit are the ones who have stored their ill-gotten wealth in the now useless Rs 500 and Rs 1,000 denomination notes

Written by Harish Damodaran | Updated: November 9, 2016 7:41 am
500 notes, 1000 notes, 500 rs note, 500 rupee note, 1000 rs note, 1000 rupee note, 500 rupees, 1000 rupees, bank notes cancelled, Rs 500, Rs 1000. currency notes cancelled When told that the Rs 500, Rs 1000 notes with you will be worthless overnight unless exchanged with smaller denominations, it would straightaway translate into large queues before banks and post offices. (Source: Reuters)

Prime Minister Narendra Modi’s announcement to disallow use of existing Rs 500 and Rs 1,000 notes from this midnight caught everyone by surprise. Here’s some quick numbers on the implications of this move.

According to Reserve Bank of India data, the total outstanding currency in circulation in the Indian economy as on October 28 stood at Rs 17.77 lakh crore. We don’t know how much of this comprises Rs 500 and Rs 1,000 notes.

But an indicator of what it could be can be seen from the RBI’s latest Annual Report. This data shows that out of the total Rs 16.42 lakh crore value of bank notes in circulation as on March 31, 2016, as much as Rs 14.18 lakh crore, i.e. over 86 per cent, consisted of Rs 500 and Rs 1,000 notes. In terms of volumes, out of the total 9026.6 crore banknote pieces, 2,203 crore or 24 per cent-plus were of Rs 500 and Rs 1,000 denomination.

PM Modi scarps Rs 500, Rs 1000 notes: Here are the highlights from his address

Simply put, the de-monetisation of Rs 500 and Rs 1,000 notes, which is what Prime Minister Narendra Modi has announced will happen from Tuesday night, would mean more than Rs 15 lakh crore worth of high-value legal tender being withdrawn from circulation. It is likely that the bulk of this would simply be deposited by people in banks rather than be exchanged for lower denomination notes: Outright replacement of 2,300 crore banknote pieces will be an obvious logistical nightmare.

The people who would be really hit are the ones who have stored their ill-gotten wealth in the now useless Rs 500 and Rs 1,000 denomination notes. It will be virtually impossible for them to exchange all this money or even deposit these in banks, as taking wads of Rs 1,000 notes day after day is going to at some point invite questions from the taxman. Effectively, it means rendering much of this black money in the form of stashed cash worthless, as there are limits to either exchanging or depositing notes whose value may run to crores of rupee.

But even for the Aam Aadmi, there will be issues. If the Rs 500 notes with him/her are deemed worthless unless re-deposited or exchanged with smaller denominations, it would either way translate into large queues before banks and post offices. The temporary disruption to trade – we are not talking here of just real estate transactions having significant ‘black’ component, but even ordinary purchases of vegetables and other essentials in markets generally dealing with cash – may not be small.