The government has banned over-the-counter exchange of old 500- and 1000-rupee notes due to suspected gaming of the system by those with black money. According to banking industry sources, the over-the-counter exchange system was being massively misused by hawala operators and others who had illegal funds to convert their old currency into new notes.
“The system was so sophisticated that people who had 10 or 20 lakhs of black money could get it converted within one or two days,” said a bank manager.
MANIPULATION
The modus operandi was simple.
A single person would either hire, or call in friends and family members, to stand in line in banks and post offices with either a driver’s license or Aadhaar card or Voter’s ID or anything else they could find.
“It was more difficult in the initial days, as each person had to stand for the entire 1 or 2 hours in the same line, but once we introduced token system to ease the congestion, the entire model changed,” said the manager.
Without the token model, a team of 4 persons could convert only Rs 16,000 per 1.5 hours (the average time a person took to reach the front of the queue.)
Since they could do this for about 7.5-8.0 hours a day, each person would have been able to stand in a maximum of five queues in different banks — going from one branch to another.
As a result, one person would have been able to convert Rs 4,000 multiplied by 5, or Rs 20,000 per day. Even if he or she charged only a 20% commission, he could earn Rs 4,000 — just by standing in queue all day.
In other words, a team of five could convert Rs 1 lakh of black money into new notes in a single day.
“But the true manipulation began after the first two days,” says the banker. “To deal with the rush, most banks started giving out numbered tokens from the second or third day, and this multiplied the gangs’ abilities.”
“In fact,” he said, “it became so bad that most people with 10 or 20 lakhs of black money were getting it converted in a day or two using these gangs.”
Once the token system was introduced, said the manager, instead of 4 or 5 people standing in different banks, a single person would go and collect tokens from 4 or 5 nearby banks.
“After this, they would keep checking each branch to see when their name would be called, and coolly walk away with cash when they were.”
“Everytime I went outside for a tea or snacks, I could see our clients, or people who were just now standing in our queue, coming out of the neighbouring bank,” said the manager.
While it took a team of 5 people to convert Rs 1 lakh of black money into new notes on the first couple of days, with tokens, a single person was able to do this, he pointed out.
As such, there some of these people — who charged commissions ranging from 10% to 40% — were earning Rs 10,000 to 40,000 per day just by standing in queue.
The manager said that the banking staff were not able to stop these people as it was beyond their powers to do so.
“I know what they are doing. But I cannot stop them from going out of the branch after collecting the token, or from entering the neighbouring bank after doing so,” he said.
The government allowed over-the-counter exchange of cash primarily for the benefit of those without bank accounts, but, said the manager, the facility was massively misused by ‘mules’.
With one person able to exchange as much as Rs 1 lakh per day, there were hawala operators — who had several ‘boys’ on their payroll — had networks of 50 or 100 people who were standing in queues.
These hawala operators, some of who were dealing in crores of rupees per day, were earning tens of lakhs each day from the demonetization and exchange program.
Not only did this cause severe inconvenience to genuine people who were trying to get their money exchanged, but it also threatened to make the entire demonetization exercise meaningless. This is what forced the government to first bring down the over-the-counter limit to Rs 2,000 after the first eight days, and then to cancel the program after running it for another five more days.
ALL IS NOT LOST
On a positive note, the heavy rush and the Rs 4,000 limit helped to prevent large-scale damage to the demonetization program.
Going by Reserve Bank of India data, the total money that was swapped over the counter via banks (excluding post offices) was around Rs 3,300 cr per day in the first 10 days, and around 1,800 cr per day in the next five days. In other words, the total was around Rs 42,000 cr via banks. (It is not known if this number includes post office collections. Even if post offices disbursed another Rs 8,000 cr, the total would be around Rs 50,000 cr.)
Even if half of this amount was ‘black’, that would still amount to only 25,000. It is estimated that the total undeclared money in India held in the form of cash was around Rs 5 lakh cr.
It is expected that around half of the total black money held in currency will be deposited into bank accounts using the benami route through friends, relatives and employees of the black money holder. Another small chunk would be deposited by the holder of the funds as declared as extra income for the ongoing year.
To really make the demonetization exercise useful and worth the pain, it should extinguish at least Rs 1 lakh cr worth of black money by Dec 30.
Given that the total amount held in 500- and 1000-rupee notes is Rs 14.2 lakh cr, this means that the total amount of old currency collected by banks and post offices by Dec 30 should be at least Rs 1 lakh cr less than this — or 13.2 lakh cr or lower. In the first ten days after demonetization (till Nov 18), the total old currency collected via banks was 5.44 lakh cr, according to the Reserve Bank.