How demonetisation has exposed the rot in our banking system

Even after 40 days of the demonetisation drive, taxpayers and ordinary men are spending hours standing in queues for small cash withdrawals. And the irony continues.

While there is news of crores of rupees in new currency notes found in possession of people helped by some bank officials, many others are still returning disappointed, sometimes without a single penny. An exposé by India Today has revealed exactly the same. Bank officials are willing to open fictitious accounts and allow the money to be laundered for a hefty cut.

Clearly, the cash supplies seem to be available in abundance to tax cheats and what appears that in reality it is manufactured crunch for the honest aam aadmi. Punjab National Bank is one of India’s oldest and largest banks. It has7,000 branches and nearly 10,000 ATMs. And a manager of this bank agreed to convert Rs 50 lakh old currency notes into a new one.

The story is similar with HDFC bank which is one of the most successful private sector banks, whose home-loan counsellor was ready to manage Rs 10 lakh a day. The sales officer of ICICI bank-the largest private sector bank, had a range of options for hiding black money by opening fictitious accounts.

The investigation revealed that officials from several leading banks are facilitating illegal deposits; illegally exchanging banned currencies; opening ghost accounts. It has detected the rot within the banking system. The question is how precarious are the safeguards of our banking system so much so that the bank officials themselves are becoming conduit to the illegal activities?

The rot within the banking system was first exposed when bank officials of the Axis Bank branch in Delhi’s Kashmiri Gate were found colluding with hawala operators to convert old currencies for a commission ranging from 15 per cent to 30 per cent.

A few days later, the Axis Bank again came under the scanner when its branches at Chandani Chowk and Noida were found to be operating 40 and 20 fake accounts respectively to convert black money into white. This is just one example how crooks have found a way around to get their ill-gotten wealth into the formal system through benami bank accounts. What is more worrying is that it could be just tip of an iceberg.

Apart from Axis bank, the officials of several banks-HDFC, Bank of Baroda, Central Bank of India, and State Bank of Mysore, have been booked for facilitating exchange of demonetised notes illegally. Till date more than Rs 400 crore in new currency notes have been seized by authorities across India, after the demonetisation was announced by the PM.

Enforcement authorities have come to realise that corrupt bank managers are tapping the currency crisis to their advantage, allowing backdoor note exchanges and charging a commission. So, when banks down their shutters early in the day with a board saying "No cash", and turn away people waiting to withdraw money or exchange their obsolete Rs 500 and Rs1,000 notes, there’s more to it than meets the eye.

In fact, authorities believe a huge currency exchange racket is thriving. Many bank managers are making a considerable profit ‘helping’ out rich acquaintances with hefty deposits. Bank managers are keeping wads of currencies for exchange for a commission of 20 per cent to 25 per cent for their rich clientele.

Revenue Secretary Hasmukh Adhia had said black money doesn’t turn white just because it is deposited in a bank account. But, it could also be a way of diverting the illegal cash to other forms of assets.

For instance, in the Axis Bank case, tax officials suspect that these funds would have been routed through the bank to buy gold. By doing so, the original tax cheat escapes by paying a nominal penalty but in the process turning his whole booty safe.

How then has the demonetisation stopped black money?

Demonetisation was announced by PM in a bid to crackdown on black money. But, the banning of the currency notes led to a spurt in activity by hawala operators, money launderers and agents who were willing to aid tax evaders convert their old currency notes into legitimate assets for a commission.

On November 22, Delhi police intercepted three people carrying Rs 3.7 crore in old denomination notes. The ED on November 30 had conducted searches on hawala operators at 40 locations across India. They were allegedly helping individuals convert unaccounted-for old bank notes into legitimate currency.

It is now becoming clear that the demonetisation more than serving its purpose has brought spike in fortune of hawala dealers. The onus now lies on the banking system to explain four things.

Firstly, how were Rs 400 crore in new currency notes garbed by only a few when common men are struggling hard to get just a tiny amount of Rs 2,500?

Secondly, how did the Jan Dhan account show a spike in the deposits after the demonetisation was announced? The Pradhan Mantri Jan Dhan Yojna was launched in August 2014 to increase banking penetration and promote financial inclusion in the country. The account holder could open the Jan Dhan account with zero balance, but after the demonetisation there has been a surge in the deposits in this account.  A total sum of Rs 39,000 crore has found its way into Jan Dhan accounts after demonetisation.

How did these bank accounts, supposedly held by the unbanked poor, suddenly turn cash-rich needs to be investigated in detail?

Thirdly, according to a report, the district credit cooperative (DCC) banks in Maharashtra alone got Rs 5,000 crore in old notes in banned denominations of Rs 500 and Rs 1,000 in just four days, between November 10 and November 14, when they were allowed to accept old currencies.

Soon, the government banned cooperative banks from collecting old notes in exchange of new notes. Why shouldn’t the spike in cooperative bank deposits into commercial banks be investigated since there is a strong likelihood of massive foul play since these institutions have a reputation of being connected to politicians?

Fourthly, the government was expecting that about Rs 3 lakh crore in bank notes may not come back, wiping out that much black money held in cash within the country.

But banks have received 12.44 lakh crore  in old Rs 500 and Rs 1,000 notes till December 10. This is about 80 per cent of the Rs 14.5 lakh crore that were circulating till Novemeber 8. The rising level of deposits has raised concerns that hoarders of illicit cash may have found a way to convert their black money into bank deposits.

It is foolish for someone to believe that crooks will walk into the bank, disclose their ill-gotten wealth and pay the 85  per cent penalty. As former RBI governor Raghuram Rajan said, they will always find a way around.

Axis Bank episode is only one instance. There are many. The challenge lies with the tax officer. Many nationalised banks are reportedly insisting on KYC (Know Your Customer – the process of a business that verifies identity of a client) for deposits of huge amount. But the very bank regulations are being misused to launder black money.

Say for instance, the black money is deposited in various defunct accounts, which are called zero-balance accounts. Since bank officials keep a tab on the non operative accounts, the money will be split and deposited with pre-dated entries.

Demand draft (DD) is another way the money is being transformed — the ceiling to  take a DD without submitting any documents is Rs49,000 and people can draw the draft by depositing notes of Rs 500 and Rs 1,000. As the DD has threee-month validity, after a few days, it is cancelled and the money is paid back through banker’s cheque after collecting the cancellation fee.

After the India Today sting was aired, All India Bank Employees Association (AIBEA) blamed the RBI for what it called was its "failure" in executing demonetisation. The AIBEA vice-president Vishwas Utagi said that hoarders were receiving cash supplies directly through their connections in the central bank; the RBI is not providing money to banks.

He even said that there should be an ED enquiry against the RBI. Remember, CBI has arrested three RBI officials till now in connection for illegally exchanging currency notes.

So, are the allegations against RBI unfounded?

Clearly, demonetisation has exposed the myth about the robustness of our banking regulations. Apart from exposing the rot in the banking system it has also provided an opportunity for the government to put strong banking safeguards in place and make our banking system impregnable.

But for the moment, our banking system has failed the objective demonetisation drive announced by PM.

Also read: Will Budget relieve pains of demonetisation?