Speculation has been rife in banking and corporate circles that deposits in banks by 30 December may exceed the amount that was immobilised. (Photo: iStockPhoto)
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What If Bank Deposits Exceed Amount Immobilised by Note Ban?

The balance sheets of banks in the country will take a hit if deposits exceed the amount immobilised by the demonetisation announcement on 8 November, experts tracking the banking sector closely have said.

Speculation has been rife in banking and corporate circles that deposits in banks by 30 December – the deadline for depositing the old Rs 500 and Rs 1,000 notes – may exceed the amount that was immobilised.

Such an eventuality is very unlikely. But in the days of “known unknowns” and “unknown unknowns” – which is what the aftermath of demonetisation has been so far – what will happen in such a situation?

If this were to happen, it could only mean that counterfeit notes have made their way back into the banking system. This would further increase the burden on the banking system.

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What if Deposits Exceed Immobilised Amount?

  • Banks will take a hit if deposits exceed the amount declared as illegal tender
  • Excess deposits would mean entry of counterfeit notes back into the system
  • It is the responsibility of banks to detect counterfeit notes
  • Bankers told The Quint that standard procedures to detect counterfeit notes may not have been followed in the mad rush after demonetisation

Experts The Quint spoke to say “all hell will break loose” if the whispers turn out to be true, adding, however, that it would be the most unlikely scenario.

According to the RBI, the amount of deposits reached Rs 11.55 lakh crore on 6 December. The figure rose to Rs 12.44 lakh crore by 10 December. What this means is that the average amount of daily deposits last week was over Rs 20,000 crore.

If the banking system continues to get deposits at the same rate, we are more likely to see deposits of nearly Rs 15 lakh crore by 30 December. That was precisely the amount immobilised with the demonetisation announcement.

The government expected a much lesser amount – somewhere close to Rs 10-11 lakh crore – coming back to the system, giving windfall gains in the form of reduced liability to the RBI.

In keeping with the prevailing thinking then, the RBI could have transferred the gains to the government. The gains thus made could have been used to distribute sops among vulnerable sections of the population.

Customers queue up outside a bank in Ahmedabad. (Photo: AP)
Customers queue up outside a bank in Ahmedabad. (Photo: AP)

But What If Counterfeit Notes Are Deposited?

Whatever amount is being collected in the form of deposits have to be submitted to the RBI’s currency chests. The amount deposited in the currency chests is credited to banks’ accounts. However, at the time of depositing cash, banks have to give an undertaking that if there is shortfall in counting of notes or detection of any fake note, an equal amount will be deducted from the bank’s credit.
Expert on banking sector who did not wish to be named

What this means is that in the unlikely scenario of fake currency notes entering the banking system, it will affect the balance sheets of banks. This will further add to the banks’ mounting challenges, saddled as they are with burgeoning Non-Performing Assets (NPAs).

Bankers The Quint spoke to say that while bank branches all over the country have the necessary wherewithal to check counterfeit notes, it is likely that in the mad rush since the currency ban, some of the routine procedures may not have been followed.

Most bank branches have machines to detect counterfeit notes. We run all notes through these machines. We followed the process despite the rush of people to deposit their notes. It is likely that at some places bankers may have ignored it. It may have happened because of public pressure.
A Banker to The Quint