India Economy

How about ‘payable to order’ currency notes ?

Krishnan Mundanad | Updated on March 10, 2018


It will record all payments made by cash and the RBI could monitor money flows

The objectives of demonetisation (launched on November 8, 2016) were to combat: (1) black money, (2) fake currency, (3) corruption and (4) stop use of black money for terrorist activities.

As per reports available in the public domain, these four vices are still alive despite introduction of new ₹500 and ₹2,000 notes. Nothing much was achieved by a sudden announcement, on a ‘fine night’ (irony intended). Those having tonnes of black money could get them replaced, for a small price, by money changers. In contrast, the common man has suffered the most, being caught unawares, with worthless papers in his hand.

Considering that remonetisation may not be fool-proof, the government can consider ‘payable to order’ high-denomination, currency notes. These notes are meant to ensure that transactions settled in cash (currency notes) are duly recorded.

Based on the historical fact that the first currency note, issued by the Imperial Bank of India, Calcutta, was printed on one side only, the proposal here is that currency notes of high denomination (i.e., exceeding ₹100), to be issued by RBI (for this purpose), is to be printed with the words, ‘Payable to order of the holder’, instead of the words, ‘payable to bearer’, on the obverse. The reverse is to be used for endorsement: ‘Payable to order of’ by all holders, excluding the last one.

They must be required to write their names and identity (Aadhaar and/or PAN), before signing and dating, on the horizontal portion of the note.

These details may be written well in advance, ahead of handing over the instrument to the endorsee, or the next holder, who must verify that these details are there in the instrument, before accepting it.

Initially, some of the holders may find it to difficult to handle the new note. The RBI could issue detailed clarifications in this regard, and publicise them in dailies. The total number of the holders could be 5, or more, depending upon the size of the note. The size could be that of a stamp paper, but as decided by the RBI. In this context, it is worth nothing that the Philippines’ 100,000 Piso note is the largest legal tender in terms of size, as reported by the Guinness Book of Records. (Its value is around $2,390).

The last holder of the note would deposit it with his bank, including Indian Post Payment Bank (IPPB), numbering 155k, spread all over India, after stating, on the reverse of the note, his name, identity (Aadhaar and/or PAN), bank account number, and duly signing it. In rural areas, where nearly two-third of India’s population lives, the IPPB would be able to render this service to its customers, provided that adequate infrastructure facility is installed beforehand in all of them, and the staff are well-trained, and the customers are familiarised with the new note.

The banker would send the notes to the RBI, which would forward their copies (both sides), either through courier/post or email, periodically (monthly, or quarterly), to the Income-tax Department.

Later on, the RBI would destroy all such notes, as per its current practice of destroying old/mutilated currency notes, etc., which are withdrawn from circulation.

While this is the gist of the proposal, these procedural matters are to be discussed, decided and detailed by the RBI, if it finds the proposal, on the face of it, acceptable for implementation. The advantage of the new note is that, its validity period, (as decided by the RBI, from the date of endorsement by the first holder) being shorter, the risk of its permanent loss and theft are precluded, unlike in the case of bearer currency notes.

Teething troubles

But there could be teething troubles. ATMs would need recalibration, lest they might go out of business. Besides, its other disadvantage compared to the other mediums of exchange is that it is for a certain amount and so cannot be made flexible later, as in the case of cheques and other instruments; the payer, or the recipient, as the case may be, can make payment of the shortfall or refund the difference in small denomination notes.

Another problem is that it may not be possible to carry it in a purse, or a vanity bag.

Similar minor problems should not bother the authorities from implementing our main proposal. Rest is a matter of procedural detail, including about the contents to be printed on both sides of the note, denomination of the notes (it could be ₹500, ₹2k, ₹5k, ₹10k, or even higher), its size, their validity period, etc.

As stated earlier, ‘Payable to bearer currency notes’ of higher denomination (exceeding ₹100), must be cancelled (we may call it: second demonetisation). They must give way to ‘Payable to order currency notes’, in respect of all payments, involving large amounts, so that (to repeat) all payments made by currency notes would be recorded, and the RBI could monitor money flows. This may be called ‘second remonetisation’.

As a prelude, first a new ₹10k, and then ₹5k ‘Payable to order notes’, may be issued by the RBI, to test whether these would be acceptable to the public without demur, and if it is, then ‘Payable to bearer currency notes’ of ₹2k and ₹500, may be withdrawn from circulation, in a phased manner and replaced by ‘Payable to order’ notes of corresponding values. The estimated timeframe for completion of our plan is five years.

There could be genuine objections from a section of the public, who may object to disclose/reveal their identity to all subsequent endorsees of the new note.

This specific problem can be tackled by allowing them to deposit the ‘Payable to order notes’ with their bankers, but at a price: the charges for printing and handling the note, as decided by the RBI, from time to time.

As per our suggestion, the bankers are supposed to collect these charges from their customers (excluding the first and the last holder) by debiting their account, as and when it is credited in respect of the note deposited, and remit the amount of charges to the RBI, on a periodical basis (say monthly or quarterly), together with a statement, enclosing the notes submitted by their customers.

Per contra, if thought fit, all holders in due course, using ‘Payable to order note’, up to its last holder, may be duly rewarded, for their additional efforts [writing their names and identity (Aadhaar and/or PAN), signing, dating, etc.], as the same would ensure that all payments, using such currency note(s), are recorded.

Use of bearer currency notes of denomination, exceeding ₹100, can be even otherwise discouraged, by implementing a very elongated procedure.

Sounding out preference

If the Centre mandates all to maintain written records, showing details of currency notes (mainly their distinctive/serial Nos., date of receiving them, date of spending them, etc.), in their possession, as on a specified date and onward, and to produce these records, on being demanded by RBI or I-T Department.

If the government invites opinion from the public as to their preference for ‘Payable to order’ high denomination notes vis-a-vis maintenance of records in respect of high denomination bearer notes, in my opinion, 99.99 per cent are likely to prefer the former.

The author is a senior citizen retired from a listed multinational company

Published on June 11, 2017

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