Cleansing The System Of Rs 500 And Rs 1,000 Notes Could Take Three Months

Banks face a logistical nightmare to replace Rs 500, Rs 1,000 notes.

Indian 500 rupee banknotes at a HDFC Bank Ltd. bank branch in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)
Indian 500 rupee banknotes at a HDFC Bank Ltd. bank branch in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

It might have been necessary. It could even be revolutionary. But, for banks, it means a logistical nightmare which will stretch out for atleast three months.

In a bid to counter black money and counterfeit currency, at 8:00 PM on Tuesday, Prime Minister Narendra Modi informed the nation that Rs 500 and Rs 1,000 notes would not be valid effective midnight.

Bank officials were summoned to the Reserve Bank of India a scarce hour before the announcement and heard the news with everyone else, people familiar with the sequence of events told BloombergQuint.

While the jury is still out on the economic impact of the decision (both negative and positive), the banking systems is already in the midst of one of the most challenging cash management exercises of all times.

Challenge 1: Collecting The Cash

The first and most immediate task at hand for banks and the Reserve Bank of India (RBI) will be the removal of the bank notes that are no longer legal tender.

According to the RBI’s annual report, the total value of currency in circulation is Rs 16.4 lakh crore, of which over 86 percent or around Rs 14.1 lakh crore is in the form of Rs 500 and Rs 1,000 notes. In terms of volume, these two denominations account for about 24 percent of the notes in circulation.

A senior government official, on condition of anonymity, told journalists on Wednesday that replacing the currency could take three to four months. Those in the industry project a similar timeline for the operation to be completed and say the real challenge will be reaching the rural areas.

“This is not a challenge of Delhi, Bombay, Bangalore. The bigger challenge is going to be in the broader network and across the length and breadth of the country and in smaller towns,” said Rajiv Kaul, executive vice chairman and chief executive officer, CMS Info Systems Ltd, the country’s largest cash management firm.

“If all of this money is coming back, it will take the entire cash management industry working round the clock two to three months to get this done in the right way,” he said.

Banks say they will do their best to reduce the inconvenience to customers and speed up the process. State Bank of India and Canara Bank have announced that working hours will be extended to account for an increase in traffic at branches. Banks are also setting up special exchange counters for old notes.

There is no need for any panic as specified bank notes can be deposited in the account without ceiling up to December 30, 2016 with the Bank.
State Bank of India press release
We are setting up additional cash counters at all branches for dealing with the additional cash transactions expected. We are also extending our business hours for assisting all customers / general public for their cash transactions.  
Canara Bank statement
The bank will equip its branches with additional cash counters to manage heightened footfall of customers. 
ICICI Bank statement

The RBI, on its part, has told banks to remain open on Saturday and Sunday this week.

Even so, the process won’t be easy. KV Karthik, partner - financial advisory services at Deloitte India said that “collecting and reporting requirements will probably go through the roof if everything goes as expected by the government.”

“For the large banks, that have reach across the country, managing the logistics across the country is not going to be easy,” he added.

Challenge 2: Replacing the Cash

At a press conference held late on Tuesday, Urjit Patel, Governor of the RBI, said the central bank had already begun printing the new series of Rs 500 and Rs 2,000 notes. BloombergQuint could not ascertain the quantum of notes published.

The government expects that it will take two or three weeks to replace the currency being pulled out of circulation with new currency, Finance Minister Arun Jaitley said at a media briefing on Wednesday.

At present, banks are re-stocking automated teller machines (ATMs) with Rs 100 and Rs 50 notes, as directed by the central bank. But supplying these ATMs with enough notes won’t be easy. Even if the quantum of notes needed was available, transporting these notes will be mammoth task.

According to Rajiv Kaul, roughly Rs 3-5 crore could be transported in one trip before notes of higher denomination were taken out of circulation. Even at the higher end of that band, it would take 2.8 lakh trips to stock ATMs with an amount equivalent to the Rs 14.1 lakh crore that is being withdrawn. With smaller denomination notes being transferred, the number of physical trips needed could be much higher.

Banks will also start stocking ATMs with new Rs 500 and Rs 2000 notes but the availability of these higher denomination notes will take time to pick up. Rajnish Kumar, managing director at State Bank of India confirmed that the bank has received the new notes of Rs 2000 denomination but said that new notes of Rs 500 denomination are yet to be received.

Challenge 3: Sharing of Resources

According to atleast two people familiar with the development, a meeting was held on Wednesday between senior bank officials, the National Payments Council of India, and representatives of the Cash Logistics Association and Confederation of ATM Industry.

The objective was to ensure equitable use of logistics resources across the banking sector.

“We are trying to recommend some kind of consistency of what each bank gets right now. Because different banks with different procedures cannot work. You have to have a standard operating procedure across the country to do this because there is no time for customised requests,” said Kaul of CMS.

Not As Sudden As It Looks

Despite the high level of secrecy that was maintained in the run up to Tuesday’s decision, in hindsight, there were clues that a move like this was coming.

On November 2, the RBI directed banks to ensure that at least 10 percent of their ATMs were configured to dispense on Rs 100 notes.

As the process involved in configuring the requisite number of machines is not complex, the banks are required to complete the exercise within 15 days from the date of the circular and report compliance.
An excerpt from the RBI’s directive to banks

The RBI has also been cautioning against fake currency notes.

In a notice on October 26, the RBI cautioned citizens against fake currency notes and said that currency notes of higher denominations are being used to put fake currency into circulation. Those concerns have been tackled by this week’s move to withdraw Rs 500 and Rs 1000 notes.

According to KV Karthik the introduction of the window to disclose black money and the government’s Pradhan Mantri Jan-Dhan Yojana were also steps that have allowed the government to move ahead with a large scale replacement of currency.