Saturday, December 24, 2016

The Demon of Demonetisation

In recent RBI history, some highlights: smooth transition to Basel regulations and efficient monetary policy under Bimal Jalan and Rangarajan, global aplomb post-recession under YV Reddy, preventing hyperinflation by Subbarao and taming of the NPAs by Raghuram Rajan. These achievements have put the RBI in prime position among central banks of the world. But the utter lack of planning and monumental mismanagement post-demonetisation by the same institution have tarnished its image.  

Banking operations other than currency operations in the country have almost come to a halt, barring exceptions. Credit is on a downturn. All the rating agencies, including Nomura, have down-rated the economic growth. The road to recovery sans GST is going to be difficult.

The 59 circulars on demonetisation in 40 days reflect the lack of sensitivity in the currency management risks. The bank’s best talent has been put to worst use and, worse still, fraudsters raised their ugly heads in a regulatory institution known for its integrity. The RBI may have been faulted now and then for untimely decisions or incongruent instructions in certain areas but its integrity was never questioned.

Disasters never come singly. There is a disaster management manual for natural calamities like cyclones, floods, typhoons, earthquake and droughts. Such disasters are managed after the event. They manage us instead of us managing them. It takes a few years for the economy to recover from a cyclone, but in the case of floods, the silt turns the next crop a bumper one. This economic disaster of demonetisation has been programmed to look like a flood but has turned into a cyclone.

There is no manual on risk management for demonetisation risks. In fact, every circular/ notification/ direction issued by the RBI is supposed to be vetted by the risk management group. But the circulars issued post-demonetisation indicated there was no assessment of risks. Even if the top officials of the Finance Ministry, Government of India, or the PMO had advised a particular course of action it is the responsibility of the RBI to stand up and explain the risks of such a decision. This did not happen, resulting in chaos.

Had the RBI insisted on 4-day holiday for banks instead of one day – and we had a number of such holidays when festivals joined Saturday and Sunday -- the banks would have had time to plan their operations. Second, the RBI releasing higher volumes of new currency to digitised banks such as ICICI, HDFC, Axis, Stanchart, CITI and a smaller release for retail cash-driven customer public sector banks (PSB) and smaller private banks, speaks of the failures in currency risk management.

Some PSBs followed suit. Some bank branches with high profile customers, who normally use internet banking for 90 percent of transactions, were doled out Rs24,000 per week while retail customers were languishing in queues either for exchange or withdrawal, some even losing their lives. RBI could not even question them. 

Had the RBI examined the risks of release of Rs2,000 notes it would not have done so. Second, post demonetisation when recalibration of the ATMs was ordered, it would have done it for only lower denominations, as ATMs are meant for short term cash requirements of people. The limits for such withdrawals could have been restricted to Rs2,000 per person during the first fortnight and, with improvement in new currency inflows, it could have been raised to Rs5000. ATM operation risks were not examined by the RBI.

The ICUs of most top corporate hospitals are networked and can be remotely controlled. An application in US or UK or Australia can kill an influential patient in India ICU or elsewhere and that is the level to which disruptive technologies are traversing. After all, the fungible money in plastic or cloud can be manoeuvred much easier.  

When it comes to the question of transforming the economy into cashless economy, RBI could have put in a white paper on cyber risks quickly. Today, when the entire data is cloud managed, and when the more digitised economies like the US are turning to cash economy as a safer mode, RBI could have mapped the risks of each digitised instrument and prepared the models that would suit the digitised Indian economy. It should have given the road map for a less cash economy even before the Prime Minister latched up to the idea. 

The charm of mobile smart phone dishing out cash in air for a 47% illiterate economy holds immense possibility of easy theft/misuse/abuse of M-Pin or password to such of them. The economy has seen new currency of Rs2,000 in billions caught in seizures within a month after its release. Is it difficult for such persons to penetrate the plastic economy? The growing cybercrime rate clearly indicates imminent disaster.

For proper foresight, hindsight is important. Reversing the damage done to the stables of RBI needs a dedicated team and the ability to listen to its sound advice, sooner than later. History would never excuse the present Governor of RBI for his leadership failure of a phenomenal magnitude.