Monday, November 21, 2016

Compensating citizens for Demonetisation hardship

Compensating citizens for Demonetisation hardship

Govt. should give Fixed Deposit rates and a 100% extra for all money in banks to individual account holders

The Government's unprecedented action of declaring the Rs. 500 and Rs. 1000 as illegal and the resulting chaos continues unabated. Everyday, the National Media - which is mostly Delhi centric - comes to know a little bit more about the hardship of people in farflung areas and tells us how devastating this has been for many people.

The Government is however happy. The banks are also happy. Why won't the banks be happy?

For too long the banks had hidden their NPAs (Non Performing Assets) from their accounts. Industrialists have been taking loan after loan, often refinancing the old loans with even bigger new loans. The previous RBI Governor Shri Raghuram Rajan, who had famously predicted the 2008 economic collapse, had forced the banks to come clean on their bad loans or NPAs.

The Gross NPAs of banks in March 2016 was 7.6%. In rupee terms the Gross NPAs stood at 5,94,929 crores at the end of March 2016. RBI Projection says this is expected to rise to 8.5% by March 2017. And it had also said that if the "macro situation deteriorates in the future, the gross NPA ration may increase further to 9.3% by March 2017".

The public sector banks, atleast a majority of those, are like personal fiefdoms of the Chairman of the bank along with a coterie of politicians. Not many can question them. For too long this nexus between bankers, industrialists and politicians had continued till Shri Raghuram Rajan as RBI Governor decided to bring this issue to public. Shri Raghuram Rajan forced the banks to make 15% provisions for restructured loans. Now that the NPAs have been made public and are reflected in the balance sheets of the banks, they required massive recapitalisation. So there were some demands of recapitalisation of banks to the tune of 70,000 crores. However, given the scale of NPAs, that was too less.

The withdrawal of Rs. 500 and Rs. 1000 notes and people being forced to deposit their own money, banks are now flush with funds with several lakh crores of money already deposited. So a few banks have even announced reduction in their deposit rates by .15 to .25%.

Unfortunately, it is a double whammy for the common man. His/her money is forcibly deposited in the banks and only partial withdrawal of upto Rs. 2000 is possible per day. So even legitimate cash kept by people is now tied up in banks. It is like a forced fixed deposit without any extra interest rate.

If the cash deposited by the public is unaccounted for then the public have to pay income tax, as well as some 200% penalty. Though under what section that penalty percentage will be applied is not known.

Government is expected to be for the people and Government has to be seen as "just" and "fair". Unfortunately, in this entire #Demonetisation episode the public has been brutally hit. So it would be fair for the Government to announce that all deposits in the banks will earn an interest rate equal to annual fixed deposit rates and a special 100% extra on amount of hardship to the common man. That would be too low and too less because this demonetisation exercise has taken more than 50 lives and have resulted in massive loss of legitimate business.

Unfortunately, this Government only demands sacrifice from people and doesn't appear to be concerned for the "sacrifices" and doing even a small bit to alleviate their stress.

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