Demonetization: Misconceptions, problems and solutions

The biggest voice I have been hearing nowadays in India (since Nov 8, 2016, when the Indian Prime Minister Narendra Modi declared Rs. 500 and Rs. 1000 notes as illegal tender of currency from the next midnight i.e. with just 4 hours’ notice) is that it is ‘Unconstitutional’ to Demonetize the currency, especially when there was a limit put on cash withdrawals on the ‘Savings accounts’. So I thought it would be better to understand what it means by ‘Savings Accounts’ or ‘Demand Deposits’

Definition of ‘Savings accounts’
A savings account is an interest-bearing deposit account held at a bank or another financial institution that provides a modest interest rate. Banks or financial institutions may limit the number of withdrawals you can make from your savings account each month, and they may charge fees unless you maintain a certain average monthly balance in the account. In most cases, banks do not provide checks with savings accounts.
_{Read more: Savings Account Definition | Investopedia http://www.investopedia.com/terms/s/savingsaccount.asp#ixzz4TG5IHZn5  Follow us: Investopedia on Facebook}
Savings accounts offer limited use of the funds in the account because they are generally not available for paying bills or buying items directly via checks or debit cards. Some accounts have Internet access, which can be used to move money from the savings account to other accounts, but some savings accounts require the account holder to physically go to the bank in order to deposit or withdraw money.
_{Courtesy: http://www.livestrong.com/article/58780-definition-savings-account/}
These deposits accounts are one of the most popular deposits for individual accounts. These accounts not only provide cheque facility but also have a lot of flexibility for deposits and withdrawal of funds from the account. Most of the banks have rules for the maximum number of withdrawals in a period and the maximum amount of withdrawal, but hardly any bank enforces these. However, banks have every right to enforce such restrictions if it is felt that the account is being misused as a current account. Till 24/10/2011, the interest on Saving Bank Accounts was regulated by RBI and it was fixed at 4.00% on daily balance basis. However, w.e.f. 25th October, 2011, RBI has deregulated Saving Fund account interest rates and now banks are free to decide the same within certain conditions imposed by RBI. Under directions of RBI, now banks are also required to open no frill accounts (this term is used for accounts which do not have any minimum balance requirements). Although Public Sector Banks still pay only 4% rate of interest, some private banks like Kotak Bank and Yes Bank pay between 6% and 7% on such deposits. From the FY 2012-13, interest earned up to Rs 10,000 in a financial year on Saving Bank accounts is exempted from tax. 
_{Courtesy: http://www.allbankingsolutions.com/top-topics/dep1.shtml}

Definition of ‘Demand Deposit’
A demand deposit consists of funds held in an account from which deposited funds can be withdrawn at any time from the depository institution, such as a checking or savings account, accessible by a teller, ATM or online banking. In contrast, a term deposit is a type of account that cannot be accessed for a predetermined period of time. M1 is a category of the money supply that includes demand deposits as well as physical money and negotiable order of withdrawal (NOW) accounts that have no maturity period but limited withdrawals or transfers.
_{Read more: Demand Deposit Definition | Investopedia http://www.investopedia.com/terms/d/demanddeposit.asp#ixzz4TG8EBOqY  Follow us: Investopedia on Facebook}
A demand deposit is money that you deposit into a bank account from which you can withdraw 'on demand' - at any time without any advance notice to the bank. Common examples of accounts that are often demand deposit accounts include many checking and savings accounts. Keep in mind, however, that not all checking accounts and savings accounts are demand deposit accounts.
Manner of Demand: There are many ways you can make a demand on your bank for the funds deposited in a demand deposit account. You can make your demand upon the bank not only before a bank teller, but also through use of an ATM, use of a debit card, online banking transfers and through drawing a check. In fact, if you look closely at a check, you'll see the words 'pay to the order of' right before the line where you fill in the name of the person you're paying. You are actually demanding that the bank pay the sum of money indicated on the check to the payee identified on the check.
_{Courtesy: http://study.com/academy/lesson/demand-deposit-definition-lesson-quiz.html}

All of the above information is picked ‘as is’ from the links provided and these are not my words. So in Legal / Constitutional terms, Banks are free to put limits on any withdrawals from ‘Savings Accounts’ at any time, including cash transactions. In reality, there is limit placed only on Cash Withdrawals from ‘Savings Accounts’ (Teller and ATMs), while one is free to make any amount of transactions using all other instruments like Cheques, Debit Card swipe at POS, Online Payments (NEFT, RTGS, IMPS) or e-commerce transactions linked to the Savings Accounts. By all legal means, Banks do have the right to limit each of these types of transactions from ‘Savings Accounts’ as well.
Another right of the depositor would be to close the account. For this, the depositor can withdraw or transfer all the balance to another account. The Bank may also use the option of Bank Draft / Banker’s Cheque _{(Refer: http://www.investopedia.com/terms/b/bank_draft.asp)} in case there is no cash available in the concerned Bank for withdrawal. So the depositor’s money belongs to depositor at any time.

Having said all this, I agree that there are real problems in Indian Economy post Demonetization. There are few major issues like,

• IT and Telecom infrastructure – in order to use online modes of payments including different wallets, you need to have proper network (wired or wireless) enabled by adequate security, which is not there even in the biggest cities (supposed to Smart-cities) in the country
• Availability of POS machines and alternatives (M-swipe et al) – the merchants either do not want to use these devices or not able to get them
• Infrastructure Charges, Convenience Fees, Service Taxes on non-cash transactions (on non-Government sites) – if you want to make payments on any of the non-Government websites, you will see either of these being charged on top of your payable amount, which is not the case for cash transactions (Tax laws, implementations, official’s behaviour are few of the underlying issues)
• Availability of lower denomination currency – after (ideally before) demonetizing Rs. 500 and Rs. 1000, there should have been enough supply of lower denomination currency tenders to the Banks, so that the real needy people do not suffer

There are also few solutions / workarounds available that can be explored to overcome the problems. (What makes me qualified to put my opinions here? – I have been making more than 90% of all my transactions without using cash for last 10 years, at least. I needed to use the cash at all, because some places like vegies vendors, maids and daily perishables dealers are really not equipped / inclined to make cashless transactions)

• Financial Education to the common people on other instruments of transaction – Banks should really employ few retired people or students to educate the people standing in the queues of Banks and ATMs on how to make cashless transactions and what all alternatives are available. At least this education should reduce the amount of money these people would withdraw in cash (if not convince them to get out of that queue)

• Availability of other legal instruments and mandate as well as incentives to use them – Government, RBI and Banks should really be working on making POS machines and other devices available to the merchants, so that people do not need cash. And more importantly there should be proper infrastructure and legal backing present to make such cashless transactions mandatory, initially there should be incentives provided to all the people to go cashless (not just at Government sites and outlets, but everywhere)

 After all these, what remains is just the people who really want to evade the taxes and charges by remaining invisible to financial institutions aka Black Money hoarders.

Union Budget 2010-11

Finally this non-event has brought me to ad nauseam boredom & I decided not to follow it so rigorously anymore. Just one bit of good news for the working class is the new tax structure proposed

Income	Tax %
0-160000	0%
160001-500000	10%
500001-800000	20%
800001-above	30%

One angle to look at this is if you earned more, it’s more beneficial to you. Just look at table below. You tell me qui bono?

Income Rs.	Previous tax	New Tax	You save
350000	24000	19000	5000
500000	54000	34000	20000
750000	129000	104000	25000
1100000	234000	114000	120000

And this came at a time when the consumer is pissed off with the level on food item inflation. This is 4^th year I have been crying out loud that the government is playing plain dumb. We have so called “some of the best economists” sitting at the top viz. Manmohan Singh, P. Chidambaram, Montek Singh Ahaluwalia. And yet the government is not able to understand a simple problem for years, that we are not making any moves to tackle the supply side problems. That’s the main reason of the inflation. If you studied economics even for a year in your curriculum, you’d understand what I’m taking about. And these people have been in the field of economic for years & yet they do not seem to heed for this.

This whole façade is simply ridiculous & there seems no sense in making a hue & cry about it. So I better shut up & leave the country for the able leaders to ruin. I better spend my time in getting self-exiled like our dear old artist M. F. Hussain.

Changing money habits

These are tumultuous times, where no one is sure about which way the global economy or the capital markets are going. In such scenario there could be many changes in the way the countries try to tackle the slowdown & recession. So it makes doubly important to keep track of the changes in the policies & adjust your money position accordingly. Here are few changes that took place which could make you change your positions.

The biggest indicator that could signal a bull-run is falling bond yields, which clearly explains the current upsurge in the capital markets. So if you are holding positions in cash or debt, a little portion (@ 10% of your holdings) at this point can be transferred to equity with a long to very long term view. Especially if any of your Fixed Deposits in banks are maturing at this point, you can see that you are not getting as high interest rates on them as you might last year. All the Central banks are pushing the interest rates downwards in order to boost the economy according to Keynesian theory. The sectors that you can look at are Banking & Capital goods, which have been battered badly in the current fall & seem to have considerable upside once the bull-run gathers momentum. Equity diversified Mutual Funds can also be a good option.

There is a clear disincentive in pledging new money to Bank FDs. The Rates offered by banks on deposits may go even more south because of new directive given by RBI on the interest calculations on the savings accounts. Currently the interest on savings accounts is offered on the lowest balance of the account between 10^th & 30^th of the month. This system will be abolished beginning from April 2010 & the banks have to offer interest on everyday closing balance. This changes the Asset Liability Management of banks a lot. The interest outgo to savings accounts will be lot more than current year, so to reduce total outgo they will have to pull down the interest offered on Deposits right from this year to maintain their interest margins consistent. Given the benefit of liquidity Savings accounts could be a better bet to Fixed Deposits. This also works well with current inflation level.

If you are planning to buy your first home & you are well assured of your jobs, you can go in for current Real Estate & Home Loans rates. Do verify the fall in prices in the area you are interested in, if there has not been much correction in prices, you might want to wait for some time as on an average the real estate rates have corrected by at least 30% throughout the country. My suggestion is to go for fixed rate with reset clause after tenure of 60 months (@9.25%) instead of floating as there could be good amount of volatility in the interest rates in coming 5 years & upside risk is high on floating rates.

In all these changes do not forget the basics of liquidity. You need to have fair amount of cash to manage your day to day needs & EMIs, in case unforeseen circumstances force you into joblessness.

Some capitalistic recollect!

Well, this recession has given me a lot of time, thanks to the great capitalist concept of lay-offs. So I’m getting some time to do my favourite thing, rumination! I am prone to pretty weird ideas and people close to me can corroborate that. I have been saying in my previous blogs that, it seems the ‘self proclaimed’ greatest capitalist nation - USA has been trying to solve all its capitalist follies by finding solution the communist way. Just look at AIG, Bank of America, and not to mention GM asking for more & more Federal bailouts. All these corporations have been greatest loss maker in the current financial downturn. Well to be precise, GM has been the laggard for a lot longer time, making spectacular losses for nearly a decade now. The very existence of the firm amazes me. Why have they not filed for bankruptcy at the start of this millennium & handed over the assets to a more efficient user like Toyota for crying out loud? What’s wrong in that, especially in the light of US not minding in financing the Federal budget deficit by selling their papers to more efficient (capital surplus) countries like Japan or China (more than $1.5 trillion combined)?

This brings me to my prime objective behind this article, if you really believe in Capitalism then why on earth you are relying on the Communist way to fix up the mess you created with your belief. Why not go back to ground zero & start looking for the clues to rebuild it. I am a firm Capitalist believer & I can’t even stand the idea of Communism. Just to strike an analogy, Capitalism relying in Communism for rescue out of the current financial mess is like Man relying on God to rescue him from the global warming situation. If you have got yourself into this deep trouble then you better think fast & stick to the basics. Well, I’m not just complaining about the situation, I actually have a probable solution in mind.

The fundamental of Capitalism is the Capital of the organization, the entrepreneur willing to take risk for the ideas he believe in. Putting his money & skills to the work to earn profits & name for him. He also can avail loans from financial organizations like Banks or VCs/PEs for funding the cause, but even they ask for the commitment from the entrepreneur in the form of initial investment. Now just look at the Feds from Capitalistic point of view, they are an organization, they have objective, they have budgets, but where is the capital (I mean Owned funds, not Capital Receipts)? In light of the latest budget proposed by Obama Government, which predicted a deficit to the tune of $1.75 trillion or 12.5% of GDP, isn’t this the most inefficient way of running the organization? Now my question is who made the rule that Government has to run only on debt? Why can’t Governments have owned funds? Why Governments can’t be run like non-profit organizations where they are accountable, even though they are not there to make profits but they have to break-even their operations in a consistent manner? Why the same does not apply to the Governments?

Many developing economies are run in the same manner, Deficit budgeting & Inflationary economy are their USPs. Given the situation of global financial systems, there needs a lot to be done to make good the losses made in foolhardy ventures taken over by umpteen organizations. If the Governments are bailing those organizations out, they can ask for capital in return to fund all the deficits they are bearing for the bail-outs. Otherwise this deficit can lead to another calamity in making; we could enter into galloping inflation worldwide, given the short supply of the resources. The point of contention is why the Governments have to be Communistic in design when the whole economy is strong Capitalistic in nature? Desperate times call for desperate measures, but then why not be desperate the Capitalistic way? I believe there are still many strong Capitalistic believers in US who could be willing to take the risk for their belief. So why not let the entrepreneurs do their bit for the revival of the economy? Why not look at the option of running the Government the Capitalistic way? Worth a shot?

One of my friends suggested me this link which corroborates my view.

Revival of global economy

There is no doubt about global turmoil on economic front but there are going to be umpteen opinions about how the global economy can be revived. The evidence is the huge strike called on by as many as 8 unions in France. This has almost stalled the whole country. As we go on from here this could be more than just an aberration.

To move the engines of growth moving as fast as they were a year back, there has to be free circulation of money in the global economy. So far whatever money was pumped into the global economy has been used to make good the losses made by bad assets of the Corporates like Merrill Lynch, Freddie Mac, and Fannie Mae of the world. So more money must be pumped in the global economy to lubricate the wheels of the engine of growth. There are basically two views about the possible quick recovery of the global economy. Let us have a look at them in brief.

One view is that of the governments world over & the actions that they are taking in a little haphazard manner. So far they have concentrated their efforts on rescuing the troubled corporations in their respective countries. So far they have spent as much as $2 trillion in this effort & almost $1 trillion is still in offering. So far the common people have been a mere observer in this preposterous sequence of events. The frequency with which the Corporates were nearing to bankruptcy & the immediate rescue packages declared by the governments to save the jobs in the country & in turn their skin has been astonishing. So should all the hard earned money of the people collected in the form of taxes be spent on revival of the sick companies? Obviously they have not been running their businesses in a correct manner. So isn’t it like rewarding the brats of classes by punishing the toppers. (This looks more like communist than capitalist to me, but hey, that’s just me! This time sponsored by the biggest capitalist, US of A!) This seems to be just an invitation to public outrage.

The second view to revival of the economy could be increasing the public consumption by putting the money directly in the hands of the people who can start spending that, it will flow in the hands of the Corporates who are doing the things right & whom the people trust. This can be done by two ways: by securing & creating jobs of the people working & by boosting the public infrastructure & thereby public spending. (This also is more or less like communism) (So the solution of capitalist follies in communism??? Shock for the American capitalism???)

Obviously in both the cases the banks have to play the role of lynchpin around which the money circulates. But for this the public confidence in the working banks needs to be restored. Both the views mentioned above cannot be executed in isolation but there has to be prioritisation of the actions taken. Should the money left with governments be spent on making good the losses first or should the infrastructure be given precedence over that? Because money also is a rare commodity & is not available in abundance & for free.

Then comes the time to ask who all are responsible for this huge farcical tragedy we got the privilege to witness. Prima facie the responsibility goes to the governments & the Corporates that benefited from the policies followed by the governments such as sub-prime lending & ridiculously low rates of interests for the housing loans & free availability of credit to any & every one. Add to that the lack of infrastructure & transparency in the rating agencies & auditors for the corporations. (Refer my previous blogs for details of this frivolity!) Now it’s time to restore some corporate governance, right after we achieve some government governance.

Unveiling the hoax

In the view of recent collapse of 4th biggest IT firm in India, namely Satyam. A great paradox! The word ‘Satyam’ means truth. It’s a tight slap in the face of the clamour that Indian IT industry was making about the highest standards they were maintaining in Corporate Governance. What is more painful is that this fraud on the statements & balance sheet was being carried forward for last 7 years, as per the disclosure given by B. Ramlinga Raju, the Promoter & Mentor of Satyam & in turn the IT revolution in India. The whole sequence has left the entire IT & Telecommunication industry shamefaced.
But there is something positive to take from this all. The investors the world over now understand that no one in the world is so sacrosanct to take their word blindly. The extent of this fraud is so horrific that no one knows the truth anymore. No one knows the value of assets & liabilities Satyam holds, the actual turnover it has or for that matter anything in the annual reports. As per the statement given by the caretaking head Mynepalli, they are not sure whether they have enough cash to pay the salary to the staff for Jan 2009.
In such a scenario no one would dare bailing Satyam out or even buy them out, even if it comes to a value of Re. 1 per share. This all was followed by unveiling few more scams in the making. Raju was about to siphon off $ 1.6 billion to his other flagship company Maytas Infra. Which luckily for the investors was discovered by media in time & Raju had to drop the idea. It followed by another event as World Bank banned Satyam for 8 years, because of data theft cases that came out in past few years.
Infosys has come out & publicly announced that they will not absorb any of the staff of Satyam, even on senior positions. They are partially right about it, as no one knows to what extent this scam goes. How can one hide a scam of an extent of Rs. 7000 crores i.e. $ 1.75 billion without having many of the staff accomplice in it. The only salvage for millions of investors is that Raju has been arrested & will be presented in the court. But the problem still is that India does not have its own version of Sarbanes Oxley Act which protects the investors’ interest. Indian counterpart of US SEC namely SEBI is a toothless tiger that only makes noise but can’t bite. This would give a big time wake up call to the bureaucrats & the lawmakers to come up with better mechanism than they have to avoid such instances in the future. At least this will get the economic reforms moving, that had been stalled since the existing government came into power and it’s been 5 years now!
The worst part of this fiasco is that it came in time when it was least needed. Whole world is crumpling under the pressure of recession & joblessness. This even has the potential to pull India into it, which so far was still hopeful of clocking growth of 6.5% in the current fiscal year. But the timing of this fiasco could not be just a coincidence; the scrutiny needs to check where all this started & how. My gut feeling is that, it all started with the dotcom burst in the Y2K. It makes a perfect sense that, Satyam should have collapsed in that burst, but thanks to innovation shown by Raju it not only survived but also was a symbol of strength. When other companies like Infosys, TCS lost their 40% of market cap in the IT slump of 2007, Satyam had lost barely 20% of its. The reason of the strength was impeccable forgery that none of the analysts could suspect.
Biggest question now for the investors is that what the auditors were doing when they signed the Auditor’s reports for all these years. This even has taken world’s trust away from the world’s big 4 accountancy & audit firms. As if the Arthur Anderson’s follies in Enron’s case weren’t enough, PriceWaterhouse Coopers wanted to test the wisdom of the people to discover another scam. Possibly we’ll now be left with only big 3 of these firms or may be we’re on the verge of all new accountability standards which brings some amount of trust back in the business. The stock market watchdogs world over need to come up with some better mechanism than current state of auditors & credit rating agencies. With the current sub-prime crisis & no. of scams that have come out in the recent times, we have all the reasons to question their business models & their integrity towards their profile.
Let us all hope that the outcome of this scam will bring some of the positives that the world has been waiting & longing for. It’s about time that we see the positives of globalisation, put our brains together to innovate the solution.