The Reserve Bank of India cannot wait for electronic payments to come of age. But before that, we must strive to achieve banking for all.
The RBI must keep alive its zeal for paperless payment. Sweden and some other countries have done away with cheques and drafts, thanks to 100 per cent internet penetration. There is no reason why we should not move in that direction. Business-to-business payments are now largely electronic, at least in the organised sector. Government departments and companies should make only electronic payments both to their suppliers and employees.
Important as this is — it cuts out black money deals, saves paper and time, and is relatively foolproof — the RBI has the more difficult task of first getting people hooked to the banking culture.
The proposal to award new banking licences only to those who agree to set up at least 25 per cent of their branches in rural areas is a good one; new banks can be counted upon to do everything in their power to break through rural resistance. One way is to lure cash hoards out of households.
There is another way of improving the outreach of banks — demonetisation. This move will mop up black money as well as expand the banking network.
The government can effectively apply the pincer of demonetisation in the following way: 1000- and 500-rupee notes should be demonetised without notice.
Those holding these notes must be instructed to deposit them in their bank accounts.
Those without bank accounts should be instructed to open accounts to deposit these notes; KYC procedures should not be fussed over.
In course of time high-denomination notes can be reintroduced but bearing different denominations, say Rs 600 and Rs 1200, in recognition of the fact that inflation has eroded their value as well as to avoid the confusion that is likely to result if the old denomination notes are reintroduced.
Marketing experts aver that before a product launch, it must be ensured that the products are available. So too with banks — banks need to have branches before the masses are exhorted to embrace the banking culture.
There are enough branches in the urban areas, but not in the rural areas. The Banking Correspondent model can be scaled up to the desired levels if government and private sector companies such as ITC and Hindustan Unilever, with a sizeable rural presence, are roped in. The banks should be ready with biometric features designed for the unlettered.
Assuming that enough rural banking infrastructure is in place, the demonetisation of high denomination notes would have two significant effects on the economy. We can expect black money to tumble out of cupboards, lofts as well as bank lockers.
Effects of demonetisation
Equally importantly, banking resistance would have been overcome. In the interim, banks should be prepared for a huge rush for withdrawals. ATMs must be cleansed of high-denomination notes and filled with 50-, 20- and 10-rupee notes like ATMs in the US that dispense only $20 bills, though for different reasons.
This shock therapy should be designed as an extremely short-term operation with wide publicity given to the post-demonetisation imperatives. After flushing out the high denominations, the next step would be to make available the new high denominations through ATMs and at banks.
The inconvenience of dealing with small denomination notes would be for a very short period, something people should be prepared to take in their stride for the larger national good.
Bank managers can train their guns on big ticket depositors at leisure by teaming up with the tax authorities. Honest taxpayers, of course, would have nothing to fear. KYC norms too can be enforced once the heat and dust has settled down. Indeed, account-holders can be counted upon to furnish residence and name proofs once they savour the convenience of banking.
Financial inclusion, an umbrella term, can become a reality only on the back of near 100 per cent banking penetration. India is thoroughly under-insured. Insurance can follow banking, with bancassurance (selling insurance products through banks) already being practised in India.
Any quick, incisive operation must be preceded by elaborate preparation. The proposed scheme would be no exception.
(The author is a New Delhi-based chartered accountant.)