Category All About Money

         Until the 1960s, all banks except the State Bank of India remained under the ownership and management of private persons. By then, banks had become an important tool for the development of economy.

         In a sudden and unexpected move that marked a major change in our history, the then Prime Minister Indira Gandhi announced the nationalization of 14 commercial banks with effect from the midnight of July 19th, 1969. These were the banks that managed around 85 per cent of the country’s deposits.

         One of the biggest changes caused by nationalization was equipping banks to work for social welfare. Sensitive sectors like agriculture and rural industries were greatly benefitted by the move.

          Nationalization helped improve the public’s confidence in banking. Altogether nationalization strengthened India’s banking network.

         The second phase of nationalization took place in 1980, when six more commercial banks were nationalized.

 

         In its literal sense, ‘liberalization’ means relaxation of restrictions or regulations. It was a policy adopted in our country almost two decades ago. It was introduced in the 1990s in our banking sector too. Manmohan Singh was the finance minister then. So, what exactly did this process mean?

        Liberalization as a policy meant the removal of some restrictions imposed by the government on its various sectors.

         The move towards liberalization not only enhanced the growth of our economy, but also boosted our banking system.

          Till then, there were strict regulations on many matters including the interest rate, lending, and foreign participation.

          With liberalization, many private banks were given license to operate in the country. These banks including the ICICI Bank, Induslnd Bank, HDFC Bank, Axis Bank etc are popularly known as the new generation banks. Contributions from the public sector, private sector and foreign banks together made the system stronger and stable. 

As the name suggests, co-operative societies are groups working based on the principles of co-operation, joint ownership, mutual help, and democratic decision making.

Banks formed by these societies, popularly known as co-operative banks, are thus, small financial entities created for banking purposes by persons belonging to a locality, or professional community, or even by those who share common interests.

Operating both in urban and rural centres in our country, co-operative banks provide banking services like savings and loans to members as well as non-members.

Although they are smaller than commercial banks, co-operative banks have been successful in financing areas under agriculture, personal finance, self employment, small scale industries etc.

The banking system has a three-tier set up. The state co-operative bank is at the apex level, the district co-operative bank is at the district level, and primary co-operative societies are at the rural level.

Compared to others, these banks provide a little higher rate of interest on deposits. They mainly work on the principle of ‘no profit, no loss’. Anyonya Sahakari Mandali, established in 1889 in the province of Baroda, is known to be the earliest known cooperative credit union in our country. They played a significant role in our economy. 

         Negotiable instruments are those that can be converted into liquid cash under certain conditions like that of a cheque.

         The transactions of these instruments in our country are regulated by a law titled the Negotiable Instruments Act, framed in the year 1881. According to this, the three negotiable instruments that can be used are – a promissory note, a cheque, or a bill of exchange.

         The Act is quite important to our banking sector as it gives statutory definitions for these three instruments as well as the conditions under which they can be used. Besides, a certain section of the Act – Section 138 – is a step towards justice.

         As per this section, if a cheque issued by someone is bounces due to an insufficient amount in his account, it is an offence. This section inserted later in 1988 was a major change in banking, because till then, there were no provisions to restrain a person from issuing a cheque without sufficient money in his account. 

          This concept surely seems familiar to all of us, as it is now filling newspapers and newsrooms across the country.

          Demonetization is the legal act of making a currency invalid, and replacing it with a new one. In other words, it could be the removal of a particular currency, say Rs 500, from circulation, and issuing a new one of equivalent value or denomination. Demonetization also happens when the currency of a nation changes.

          Many instances of demonetization have taken place in the world. One classic example would be the withdrawal of currencies in countries under the European Union to replace them with the euro. However, it was not a sudden and unexpected move. People in those countries were given enough time to convert the older currencies to the euro in order to ensure a smooth transition.

           Such a move could definitely affect people, but as a process, demonetization has proved effective in controlling counterfeiting and black money in any country. 

        Many countries in the world have faced the process of demonetization at different periods. Some succeeded and others ended up in failure. One such failed attempt happened in the erstwhile Soviet Union in 1991.

        Under the leadership of Mikhail Gorbachev, a sudden monetary reform was initiated on January 22nd. At around 9 pm, televisions announced the President’s withdrawal of the 50 and 100 ruble banknotes from circulation. The move was to control black money and counterfeit. However, it created a stir in the public. Some were able to make exchanges for the currencies with them but most of the people couldn’t, because the exchange had many limitations. There were only three days given for exchange, and only 1000 rubles were to be given to a person.

        Although the bid to control malpractices succeeded to an extent, demonetization had a huge negative effect. Within months, consumer prices increased, and people started losing jobs. Within eight months, Gorbachev faced a coup.

        The monetary reform of 1991, as it is popularly called, later led to a redenomination of the ruble in 1998.

Australia is a country that once successfully demonetized its currency. In 1996, the country replaced its banknotes with their plastic or polymer equivalents. The move was intended to fight financial malpractices that were growing rampant.

            Like all other countries, Australia too, was facing severe problems caused by counterfeit currencies and black money. It was then that the Reserve Bank of Australia developed polymer notes with better security features.

            The initial steps of the process began in 1988, when the bank issued a commemorative 10 – dollar polymer bank note. Later in 1996, all the existing currency notes were made invalid and the new ones entered circulation. They came in all denominations from 5 to 100 dollars.

            As the withdrawal and replacement happened in various steps, it was not too difficult for the country to switch to a new system.

            In spite of the initial costs incurred to manufacture the new notes, the move was successful and it also helped in making the country business friendly.

            The concept of demonetization is not something new in modern India as it had gone through the same twice before – in 1946, and 1978.

            Did you know that we once had the banknotes of Rs 10,000? Those notes were the largest currency denomination printed by our central bank, the Reserve Bank of India. It happened in 1938 and in 1954.

            The year before the country gained independence, banknotes in denomination of 1000 and 10,000 were taken out of circulation. This move that came in January 1946 was as part of the country’s effort to prevent black money. It is said that the invalid notes were sold or exchanged at 60 to 70 per cent of their price. The sudden withdrawal of the currencies had become a ‘death blow’ to tax evaders.

            However, those banknotes along with that of Rs 5000 were later reintroduced in 1954. The second instance of demonetization in modern India happened in January 1978. The government headed by Morarji Desai, withdrew from circulation notes of Rs 1000, Rs 5000 and Rs 10,000. The reason behind this was to stop the circulation of counterfeit currencies.

            The currencies of Rs 500 and Rs 1000, however, returned to circulation later. In 1987, the Rs 500 note was reintroduced and the latter, in 2000.

 

You might have heard of the recent withdrawal of higher denomination currencies in the country. This happens to be the third instance of demonetization in modern India. With this, old banknotes of Rs 500 and Rs 1000 have become invalid and the government, with the help of the Reserve Bank of India has started issuing new currency notes in the denomination of Rs 500 and Rs 2000.

       As a result of this major move, banknotes belonging to the Mahatma Gandhi series that we now use will be replaced by the Mahatma Gandhi new series. However, the notes of Rs 100, Rs 50, Rs 20, Rs 10 and Rs 5 will remain unchanged.

       The announcement of demonetization made by the Prime Minister Narendra Modi on the night of October 8 over television has been considered historic by many people.

       In what is regarded as the most important cleanliness drive in the country, the sudden step is expected to curb counterfeit notes used for various criminal activities like terrorism, and corruption. The move is also expected to make the country more digital. 

      The most important argument in support of demonetization is that the process will help curb financial malpractices in the country.

      This includes money for which tax is not paid or in other words, black money. It is believed that a considerable amount of black money is stored in denominations of 500 and 1000. Hence, by making them invalid, users will be forced to get rid of them. This will also help the government to find out the sources of black money circulating in the country.

       As per the data from the Reserve Bank of India, the supplies of banknotes in all denominations have increased by 40 per cent in the past few years. But the number of currency notes in the denominations of 500 and 1000 has increased more than that. The reason given for this is the use of counterfeit notes.

      These notes are used for many illegal activities like drug trafficking, financing terrorism, corruption etc.

      Demonetization is also expected to fight such crimes too.

      Besides, the process takes India a step ahead to the digital world. So in spite of the difficulties, many economists say that demonetization will help the country in the long run.