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I-T lens on current account deposits over Rs 12.5 lakh. All the news and more post demonetisation.
50% of ATMs to be reset within a week
Most ATMs currently dispense only Rs 100 notes as they have to be recalibrated centrally as well as individually, reports Arup Roychoudhury.
Half of India's 200,000 ATMs will be recalibrated within the next seven days, so that they can dispense the new series of Rs 500 and Rs 2,000 denomination notes.
Most ATMs are currently dispensing only 100 rupee notes as they have to be recalibrated centrally as well as individually.
The government has set up a taskforce under Reserve Bank of India Deputy Governor S S Mundra to speed up the resetting of ATMs.
"The government is now focusing on making cash available on offsite ATMs as well," said an official.
A second official confirmed the development and also said that printing of the new Rs 500 rupee notes has also been stepped up.
Finance Minister Arun Jaitley had said last week that it may take up to three weeks for all 200,000 ATMs in the country to be recalibrated.
I-T lens on current account deposits over Rs 12.5 lakh
CBDT asks banks and post office to report such deposits between 9/11 and 30/12, reports Shrimi Choudhary.
The Central Board of Direct Taxes (CBDT) has amended rules in the Income Tax Act and asked banks to furnish a statement of financial transaction in one or more current accounts of a person for cash deposits of Rs 12.5 lakh (Rs 1.25 million) and above between November 9 and December 30.
The CBDT's notification on November 15 also said that for all accounts except current accounts, banks would have to submit details of persons depositing Rs 2.5 lakh (Rs 250,000) and above for all accounts except current accounts.
Sources in the Income Tax department indicated that notices would be issued to persons whose cash deposits comes under the annual information report or statement of financial transaction and ask to explain their source of income.
The notification also said that compulsory quoting of permanent account number (PAN) was required in case of cash deposits exceeding Rs 50,000 on a single day or over Rs 2.5 lakh between November 9 and December 30.
The new rule comes in the wake of demonetisation of Rs 500 and Rs 1,000 currency notes, where the government had on 8 November directed Income-Tax department to coordinate with all banks and post offices to furnish details of individuals who deposit cash of Rs 2.5 lakh and above.
Prior to this amendment, cash deposits of Rs 10 lakh (Rs 1 million) and more in a financial year in accounts other than current accounts were to be reported under the annual information report (AIR) by banks to the tax authorities.
For the period under demonetisation, it has been reduced to Rs 2.5 lakh and more.
In case of current accounts, cash deposits of Rs 50 lakh (Rs 5 million) and above, were to be reported under AIR.
The amendments to the Income Tax Act are limited to the period under demonetisation,
AIR is meant for high value transactions which is required to be furnished under section 285BA of the I-T Act by 'specified person' in respect of 'specified transactions' registered or recorded by them during the fiscal year.
Banks has to sent AIR once in a year to the department. But now, under the new rule, banks, post offices need to generate separate report of the given period.
Confirming the development, a senior Income Tax official said "we need to check the source of income of the deposits in the given time period as there could be chances of mismatch between their tax filing and deposits."
The department, he added, was pursuing the non-filers/tax evaders vigorously till all high-potential individuals are covered.
"If an assessee fails to explain deposits, there could be a scrutiny. As per the rule, if deposits in banks/post offices do not match with individual tax filing, it could attract 200 per cent penalty on the tax."
Mitil Chokshi, senior partner, Chokshi & Chokshi, a leading Mumbai-based chartered accountant firm, said, "It will be critical for the assessees to ensure accurate records and complete basis of source of funds during this period in context of their preceding years' history. Failure to satisfy the assessing officer could lead to reopening of assessments of previous years. Hence, the deposits have to be very carefully calculated procedures,"he added.
Currency in circulation shrinks: RBI
Cash shortage hits small businesses reports Abhijit Lele and PTI
Following the central government's decision to demonetise all existing Rs 500 and Rs 1,000 notes, the currency in circulation shrank by 50 basis points in the week ended November 11, 2016.
According to the Reserve Bank of India's data on reserve money, the currency in circulation during the week under review declined by Rs 9,700 crore to Rs 17,87,700 crore, compared to the previous week.
In the week ended November 4, the currency in circulation had grown by Rs 20,100 crore (1.1%) to Rs 17,97,400 crore.
In the week ended October 28, the stock of currency in circulation had risen by Rs 18,200 crore to Rs 17,87,700 crore, according to the RBI.
With the currency in circulation shrinking, small businesses such as roadside restaurants, vegetable vendors and grocery stores that use cash as a mode of transaction, have been hit.
Daily labourers, too, were rendered jobless as construction and other activities came to a standstill in view of cement, sand and other supplies not coming in.
Truckers were reportedly stranded on highways as drivers ran out of valid currency notes, affecting the movement of goods in several parts of the country.
Vegetable and fruit wholesale markets, as well as foodgrain mandis in many parts, also reported very low business due to a shortage of cash.
Demonetisation: No 'windfall gain' deploying anytime soon
With the demonetisation of Rs 500 and Rs 1,000 notes, some Rs 14 lakh crore worth went out of circulation reports Arup Roychoudhury.
As the RBI continues printing cash to replace demonetised notes, any unclaimed amount can theoretically be claimed as a windfall gain to the government.
In practice, though, deploying such gains immediately will cause disruption in the financial system.
The RBI will have to take a long-term view on how to deploy any such gains, whether by infusing into the banking system or paying the government through dividends.
The central bank and the government have yet to calculate how much that gain will be, senior officials have told Business Standard.
With the demonetisation of Rs 500 and Rs 1,000 notes, some Rs 14 lakh crore worth went out of circulation.
The RBI is printing new notes of Rs 500 and Rs 2,000 denomination. However, for a number of reasons, including that a lot of the notes withdrawn were counterfeit, a certain amount of notes will be unclaimed.
That portion will be a gain to the Reserve Bank.
"It is true that there will be a windfall gain, theoretically. Practically, it would have huge repercussions on liquidity if you suck out money from one market and put it into another. The RBI might keep some of the unclaimed legal tender to infuse in money markets," a government official said.
A senior finance ministry official is said to have told investors earlier this week that the Centre expected around Rs 4 lakh crore worth of currency to be unclaimed.
And that it would not be a good idea for the government to use this money to cut tax as it would be a one-time accrual, not income but wealth.
The money, should the government decide, can be used for bank recapitalisation and for infrastructure spending, the person is believed to have said.
"The RBI will have to see how to manage this money. Obviously, there will be gains; that needs to be deployed in a calibrated manner. One obvious way is capital infusion for banks. Some amount might come to the government in the form of dividend by RBI. All this will have to decided once we know how much amount remains unclaimed from the notes that are reprinted," said the first official quoted earlier.
There was no question, though, of any of that being used to finance this year's fiscal deficit of 3.5 per cent of gross domestic product, the person said.
"It has to be a long-term move. Short-term utilisation will lead to disruption in the monetary system."
At a conference in Singapore, former RBI governor D Subbarao has said any move by the government to treat unclaimed or un-surrendered cash as profit will be 'ill-advised.'
At a banking conference, he said by law the central bank has to transfer all its profit to the government.
'If the RBI treats this as a profit, and the Centre demands that this be transferred to it, and they use this to play Robin Hood or to recapitalise the banks, or for whatever other purposes, this will send out the wrong message. I don't believe this is the intention of the current government but if they were to do such a thing, it will be highly ill-advised,' Dr Subbarao is quoted as having said.
Demonetisation may hurt RBI balance sheet temporarily
Government bonds are used as securities against the central bank's overnight liquidity operations, reports Anup Roy
Tuesday, November 15, deposited a record Rs 1.8 lakh crore of surplus liquidity with the Reserve Bank of India, and this will likely increase in the coming days as the demonetisation exercise continues till December for the lenders.
But does the RBI have enough bonds in its balance sheet that can be mortgaged against the surplus deposits? Experts are divided on this.
Government bonds are used as securities against the central bank's overnight liquidity operations.
While lending to banks, the RBI takes these bonds, while keeping surplus funds of banks, the central bank uses bonds on its books as a collateral.
At any time, the central bank maintains a certain portion of its assets in government bonds.
The RBI comes to the secondary market anonymously to buy bonds when the asset class shrinks beyond a particular point.
At the end of June 2016, the RBI's total bond holding was Rs 7 lakh crore.
However, if the demonetisation exercise turns out to be a grand success, banks' deposits with the RBI will likely outstrip, or test the limits of the central bank's total bond holding, say experts.
"Due to restrictions on withdrawal by the government and operational glitches, there are more deposits than withdrawal. This may lead to excessive liquidity in the banking system -- necessitating its sterilisation. Estimated G-Sec (government security) holding of RBI stands at Rs 6.5 trillion to Rs 7 trillion (lakh crore), suggesting the RBI will have to explore alternative and innovative ways for sterilisation of this liquidity glut," said Soumyajit Niyogi, associate director, credit and market research group at India Ratings and Research.
This might hamper the central bank's ability to act normally for months to come.
While an official RBI response could not be obtained for this report, an official at the central bank said the rise in reverse repo amount is a technical strain.
However, the official maintained that Rs 7 lakh crore of bonds are more than enough for any situation and the present situation will normalise within a month or so.
The total bank deposits, apart from the usual Rs 60,000 crore to Rs 80,000 crore of mobilisation every month, are going to zoom because of this demonetisation exercise.
After setting aside a portion of the money for mandatory bond investment (24.75% in bonds and 4% in cash), banks will park the excess money with the central bank as there is no other avenue to invest those funds in the absence of credit growth.
There are even not enough bonds to buy to accommodate this money.
Therefore, according to experts, the more the government is successful in the scheme, the more painful it will be for the central bank to manage its balance sheet.
The RBI cannot go to the market to buy bonds to replenish its reserves as that will put further cash in the system.
While nobody knows how much money can be recovered from the demonetisation scheme, assuming the entire money worth Rs 14 lakh crore to Rs 15 lakh crore comes back as deposits and the restrictions on withdrawal continue till December, it would be a massive amount of liquidity for the banks and the RBI to manage.
Therefore, the RBI will have to use innovative and unconventional ways to conduct its liquidity operations.
In fact, the central bank has already started doing it. On Wednesday, November 16, for the first time, it conducted reverse repo with a 91-day treasury bills.
Experts say it is just the starting.
"If demonetisation leads to collection of less than Rs 9 lakh crore to Rs 10 lakh crore, nothing will likely change, but if it is more than Rs 12 lakh crore, the RBI for sure will increase the cash reserve ratio or will ask the government to issue special bonds under the market stabilisation scheme, or will issue massive amount of cash management bills," said the head of treasury at a foreign bank, asking not to be identified.
"The government will not use the money, but it will remain with the RBI as government cash balance," said the banker.
The RBI cannot let go all its bond securities for the sake of its own liquidity.
In any case, the situation will only compound for the banking system and the RBI with every passing day of chaos.
The RBI, in this scenario, can only hope to print new notes fast enough and restore liquidity in the hands of the public as soon as possible.
Liquidity crunch sours milk economy
The milk economy has been affected by around 50 per cent, reports Sohini Das.
Demonetisation is choking the country's milk economy.
"The trucking industry operates primarily on cash, and right now there is a dearth of cash in the economy. This has obviously hit the transportation of goods, and milk is one of them," said Kuldeep Saluja, managing director of the Delhi-based Sterling Agro Industries.
There was, he added, a problem at the distributor and retailer levels -- segments that operate on cash transactions from consumers.
Saluja said the milk economy was affected by around 50 per cent.
Sandeep Aggrawal, director, SMC Foods, said, "We have made payments to farmers through net banking and cheques. The flush season for milk is expected to begin in another 10 days or so. However, there is a problem at the distributor end, who cater to the retailers, as customers are short of cash."
This is likely to hit the unorganised sector players more.
The All India Motor Transport Congress, an apex body of transporters (cargo and passenger), recently said while the association supported the government initiative, the road transport industry was facing its worst crisis in recent times.
"The movement of goods and material as well as movement of passenger vehicles and tourists in the country is paralysed and is poised to come to a standstill," AIMTC Chairman K S Atwal said.
"The supply of essential supplies such as milk, vegetables, fruit and medicines will get affected with immediate effect," Atwal added.
Ashok Shah, chairman of V Trans, one of the largest road transport companies, said per-vehicle productivity was down 25% to 30%.
The situation was manageable for big operators who have credit arrangements (for fuel), he added, but smaller operators have been affected. \
On long-haul routes, operators pay Rs 50,000 in cash to drivers. With the new limit on weekly cash withdrawals, this cash flow has been impacted.
Cash windfall for discoms as defaulters rush to clear dues
10-fold rise in collection for some discoms, reports Shreya Jai
Demonetisation seems to have led to a windfall for power distribution companies (discoms) across the country.
The discoms are witnessing defaulters coming forward to clear arrears and in many cases, consumers also depositing advance payment.
The government has allowed consumers to deposit old currency notes in state electricity boards (SEBs) to pay bills.
For private discoms, there is a daily limit of Rs 4,000 per consumer to be paid by cash.
SEBs, reeling under debt and high percentage of commercial losses, have welcomed the sudden surge in cash.
At the Paschimanchal Vidyut Vitaran Nigam, one of the five state-owned discoms in Uttar Pradesh, the collection was Rs 500 crore (Rs 5 billion) in the past four days alone -- a tenfold increase over normal days.
The collection figure at the Uttar Pradesh Purvanchal Vidyut Vitaran Nigam, another UP discom, was Rs 90 crore (Rs 900 million).
A senior official at the UP Power Corporation said collection is Rs 20 crore (Rs 200 million) higher than usual, but there is no distinction as arrear or bill payment.
"People are paying in absolute amounts to get rid of old currency. We'll know in a month's time how much of it is bill payment and how much is to clear dues. We would then calculate the realisation against bad debt."
The three discoms in Rajasthan collected close to Rs 480 crore (Rs 4.8 billion) in four days after the announcement of demonetisation.
The collection in a month usually is around Rs 2,000 crore (Rs 20 billion).
Rajasthan's discoms are saddled with losses to the tune of Rs 80,000 crore (Rs 800 billion) -- the highest in the country. It is followed by UP with Rs 50,000 crore (Rs 500 billion).
Rajasthan state government officials said the sudden cash influx would not make any difference to their coffers, but they might be able to pay back some portion of their working capital loans.
Rajasthan has the highest technical and commercial loss among all states at 27% followed by UP with a similar loss figure.
One of the major reasons for commercial losses is default in bill payment and energy theft.
Some are hopeful that compliance to paying electricity bills might improve. "We would try and collate data of the defaulters once the initial euphoria is over. There are many who have paid arrears of months together. They will be marked," said a senior UP state government official.
In Delhi, which has two privately owned discoms, the footfall increased multifold.
For Reliance Infra's BSES, the footfall at their billing kiosk increased three times.
At Tata Power Delhi Distribution, the footfall doubled in four days.
The SEBs, though, fear this could be shortlived, as there is a likelihood of a liquidity crunch in the coming months.
SEBs across UP, Rajasthan, Delhi and Haryana expressed the sentiment that this is a shortlived affair.
"The same consumer who is clearing arrears now would go back to defaulting on payments again. This gives us a chance to start a 'name and shame' campaign for defaulters, but that will take some months," said a senior power sector executive in UP.
Demonetisation: Textile, leather units feel heat
Most firms in labour-intensive sectors haven't the cash to pay daily wagers reports E Narasimhan and Virendra Singh Rawat.
The textile and leather sectors, major sources of employment, are facing heat from the Centre's decision to demonetise Rs 500 and Rs 1,000 currencies.
Companies are not able to pay wages and so, people are staying away from factories.
The other challenge, mainly for the unorganised sector, is procurement of raw material.
With labourers not coming to work, this is impacting output.
The exporters association at the textile hub of Tirupur in Tamil Nadu has welcomed demonetisation, but requested withdrawals of higher amounts, based on the average they have been regularly withdrawing from banks for the past six months.
This would, they plead, enable payment of weekly wages and other sundry expenses.
Of the around 600,000 workers at Tirupur, 40 to 50 per cent are migrants. Many don't have bank accounts. These workers usually get paid Rs 300 to Rs 400 a day.
"We are ready to open accounts (for the work force) but bankers are burdened with a heavy load since demonetisation came into effect. They are not able to open thousands of accounts in the current situation," said an exporter.
"We require Rs 10 lakh to Rs 15 lakh a month in cash to pay employees, but the banks are only allowing withdrawal of up to Rs 20,000," says Sabu M Jacob, chairman, Kitex Garments.
"Every month, we have 150 to 200 new employees joining; they might have to be paid in cash till they get a bank account. Even normally, it would take 15 to 60 days to open an account for migrant workers; now, the opening of new accounts has come to a standstill."
In the leather industry, 90 per cent of the units are small and medium enrterprises. The major problem is sourcing of raw material, supplied mostly from rural parts, said Rafeeque Ahmed, chairman, Council for Leather Exports.
"On a daily basis, half our workers have not been reporting to duty by rotation, since they are queuing at the banks to exchange money," added Uttar Pradesh Leather Industries Association's former head Taj Alam. He feared export order deadlines would not be met, leading to loss of customers.
The leather hub of Kanpur employs roughly 100,000 workers and clocks around Rs 7,000 crore (Rs 70 billion) in annual exports. Units here are not able to pay their workers in this liquidity crisis. Last week's wages were largely unpaid.
"Most of our workers either do not have any bank account or have little savings in them. Besides, the small cash at their home is in the from of the demonetised currency, which needs to be exchanged," said Alam. Productivity had dipped by half.
The positive side of the story, according to a senior official from the industry, is that many of the units in the traditional clusters were not recording provident fund and other employee benefits properly, since most of the transactions had been in cash -- they will either pay less or don't show it on their records. The new move will obviate this.
Industry sources said some companies were giving two months salary and bonus in advance, to dispose of Rs 500 and Rs 1,000 notes.
I-T notices to religious, charitable trusts
The notices advises the management of such institutions not to deal with Rs 1,000 and Rs 500 notes Shrimi Choudhury.
The Income-Tax department has issued letter to dozen of religious and charitable trusts, asking them to furnish details of 'cash balances' as on November 8, following the demonetisation of Rs 500 and Rs 1,000 currency notes.
The notices are being sent under Section 133(6) of the Income Tax Act, 1961, which empowers the I-T authorities to compel banks and other authorities to furnish information which could be useful in connection with any pending proceeding or enquiry.
According to the notice, the trust and societies has been asked to submit cash balances as per their books of accounts as on March 31 up to November 8.
'In the backdrop of this demonetisation of old currency notes, the department is also aware of the pressure or temptation that may be there on trusts and societies to accommodate others,' it noted.
Citing the deposits made in banks after November 8, it said 'deposits shall be part of scrutiny by the department after December 30.'
The notice also advises the management of such institutions not to deal with Rs 1,000 and Rs 500 notes, by 'either accepting cash or paying in cash for any of your activities after November 8, 2016.'
Road developers likely to face liquidity issues over toll exemption
The infrastructure sector is a significant contributor to gross non-performing assets in the banking system. Amritha Pillay reports.
Road developers were likely to face liquidity issues over toll collection lost due to the government's decision to ban high-denomination currency notes, rating agency ICRA said in a statement on Wednesday.
'Toll plazas have been collecting high-denomination notes like other public utilities. To avoid traffic snarls, the National Highways Authority of India had exempted tolling on its stretches initially till November 11, 2016, which has been extended till November 18.'
'The loss of toll revenue for the 10-day period is expected to result in significant liquidity stress for most of the rated road projects, except the ones with a sizeable accumulated surplus and/or structural features like availability of the Debt Service Reserve Account (DSRA),' ICRA said in its note.
The infrastructure sector is a significant contributor to the gross non-performing assets in the banking system.
Most infrastructure companies have been struggling to meet regular debt obligations due to low revenue generation.
The DSRA, the note added, was low for certain developers owing to various factors like slow traffic growth, high premium payments and modest toll rate hikes on account of benign wholesale price inflation over the past few years.
ICRA estimated the loss of toll revenue for around 115 toll projects of the NHAI operated by private players at Rs 460 crore (Rs 4.6 billion) for the 10-day period.
Beyond the 115 projects considered, the note added, the impact could be higher.
'These (115) projects constitute a very small percentage of the operational projects and hence the credit impact on the sector can be substantial,' it said.
Shubham Jain, vice-president, ICRA, added the loss of revenue would lower the ability of road developers to service debt commitments in the short term.
"Most road projects have been operating on a low buffer over the DSCR. Loss of at least one-third of the monthly toll revenue is likely to result in inadequate cash flows to service debt commitments for November and December. Moreover, post commencement of tolling, traffic levels are expected to remain low initially," he said.
However, ICRA noted the NHAI concession agreement provided for adequate safeguards against such losses and developers could seek compensation.
Investors watch note ban, hope for quiet fadeout
Analysts expect demonetisation to impact economic growth, reports Puneet Wadhwa.
Experts say the markets, for now, will focus on how the government tackles note ban and how soon can normalcy be restored.
"The markets are not worried about the winter session of Parliament this time around, including the progress on GST implementation, but are concerned how the transition of the note pullback will take place. Although Parliament will see this issue being raised, the markets will focus on ground reality. Cash demand will remain high till December 2016, and the markets will worry how soon these issues are resolved," said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.
According to him, given the sharp fall over the past few days, there might be a mild recovery of 2% to 3% from the current levels over the next few weeks.
"Given the demonetisation impact, the markets will take one more quarter to go back to record high levels," he added.
Following the outcome of the US presidential election and the note ban, markets have seen a fall, with the Nifty50 index slipping over 400 points, or 5.1%.
Analysts expect demonetisation to impact economic growth, which, in turn, could dent the financial performance of companies, especially those in the consumption-related segment.
According to Mahesh Nandurkar, India strategist at CLSA, a pick-up in corporate earnings in the December quarter onwards is a possibility due to the base effect. But now, everything has to be recalibrated.
"A pick-up in corporate earnings will be delayed given the demonetisation move. Our view is that the earnings growth in the second half of FY17 will be 12% to 14% (earlier 18% to 20%). Our FY17 estimates now stand at 10% to 12%, while FY18 estimates are 15% to 18%. Our 12 month Nifty target is 9,300 to 9,500 levels," he added.
"Before demonetisation," said Ajay Bodke, CEO and chief portfolio manager -- PMS at Prabhudas Lilladher, "all eyes were on progress on implementation of the GST Bill. So, these are the two key issues that will dominate discourse, and on which markets will keep tabs on. The upside will remain capped at 8,700 levels. The downside, too, appears limited from here on."
Boost expected after a while for primary property market
Developers and investors alike believe demonetisation would help reduce interest rates and revive demand for homes. Raghavendra Kamath and Karan Choudhury report.
The ban on Rs 500 and Rs 1,000 notes could be an unlikely boon for primary housing markets.
Experts say the move will boost the primary home sales market in the medium to long term as the resale market takes a hit.
Developers and investors alike believe demonetisation would help reduce interest rates and revive demand for homes.
"We have seen a rise in enquiries. I am not saying there is a conversion, but definitely a lot of enquiries. People want safety for their principal investment but want to invest with a developer who will deliver," says Niranjan Hiranandani, managing director of the Mumbai-based Hiranandani Group.
According to property brokers in the Mumbai Metropolitan Region and National Capital Region, the country's two largest in the segment, the resale market has stopped since demonetisation was announced -- it is dependent on cash dealings in a big way.
Some think there will be a surge in demand by February. "It is going to happen in the next three months or so. People are now becoming cautious about their transactions. They will only approach organised builders and this would help in increasing prices as well. The move by the government has increased the liquidity of banks, too, and there might be a reduction in interest rates," said Prashant Solomon, treasurer for the NCR unit of the Confederation of Real Estate Developers Associations of India.
However, other say such predictions are far-fetched. "Developers might be trying to give a positive spin to the demonetisation move. People are waiting for the impact (to be clear). Right now, there is too much confusion," said a senior analyst from an international brokerage.
Anita Arjundas, managing director at Mahindra Life Spaces, the realty arm of the Mahindra group, says: "Prices will fall in the secondary market as people are not able to do deals the way they wanted to do, but primary sales will improve as interest rates are expected to come down."
Gaurav Gupta, director at the Omkar group, says a lot of buyers from a slowing secondary market will shift to the primary market. "Whenever interest rates fall, small-ticket apartments could see good pick-up," he said.
Amit Bhagat, chief executive at ASK Property Investment Advisors, believes the primary market will get the benefit in a year, as people who deal with cash and rely on cash-based transactions will shut shop.
"The market will get organised. Supply will get affected, but the real estate market will stabilise later on."
