Currency ban: all sectors happy to help
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With the Centre’s decision to scrap old currency notes of Rs500 and Rs1,000 on 8 November, the financial sector is now bracing itself to deal with the move’s impact. Banks and post offices were thrown open to the people on 10 November. Long queues were reported outside branches across the country, as people scrambled to exchange their old notes. So, what are banks doing to deal with the situation? What steps are the major companies in the mutual funds, insurance and pension sectors taking? Mint Money tells you the impact on the financial industry and how it is gearing up to deal with the situation.
Banks such as the State Bank of India (SBI), ICICI Bank Ltd and Axis Bank Ltd are providing exchange counters where you can exchange your old Rs1,000 and Rs500 denomination notes. Rajiv Anand, executive director, Axis Bank Ltd, said, “We have put (in place) special arrangements for senior citizens and women. We are also regularly in touch with the RBI (Reserve Bank of India) to understand the flow of currency notes. Currently, the flow of Rs100 is in short supply. Right now, customers can get Rs2,000 new notes.”
All banks will also remain open this weekend, i.e., 12 and 13 November, to facilitate the exchange and deposit of old currency notes of these two denominations.
The maximum you can exchange in cash against old notes is Rs4,000. According to Anand, in an internal circular, RBI has asked banks “to allow this only once in the next 14 days”. For this you will have to provide a photocopy of an identity document along with a filled-up form. Do also carry the original identity document. Remember that there is no limit on the amount you can deposit in the form of your old notes. Also, you have 49 days—till 30 December—to exchange them. So, there is no need to panic or rush to the bank immediately.
To deposit money, you don’t necessarily have to go to your own bank’s branch. You can visit any bank’s branch, RBI-specified offices and post offices to exchange the old currency notes. Your money will be credited to your bank account if you don’t want anything in cash. What about the cost of transaction? Banks such as ICICI Bank and Kotak Mahindra Bank Ltd have waived cash deposit charges in savings accounts till 30 November.
ATM transaction charges have also been waived for ICICI Bank customers at same-bank ATMs till 31 December. Meanwhile, consumers are finding it difficult to manage without cash and are looking to tap into the option of multiple bank accounts. “My sister’s wedding is on 18 November and I need a lot of cash, Rs20,000 limit per week is not sufficient for me. Hence, I am routing the money to my four different accounts so that at least I will be able to get Rs80,000 cash this week,” said Gufran Khan, 28, who works as a senior manager, with Indiabulls Finance Centre in Mumbai. Khan was at the Yes Bank Ltd branch in Mumbai to drop his cheque. He said he couldn’t wait in the long queue for changing notes as it would have taken him hours before getting back to work.
Although these are early days to put a number as to how much money will flow in mutual funds, officials from the mutual funds industry say there is no doubt that money will come in. “Increased inflows into mutual funds is not an expectation; it’s bound to happen. If money comes in from the unorganised sector to the organised sector and the bank deposit levels go up, then some of the money comes into mutual funds. Mutual funds are well prepared and well-regulated to handle this incremental inflow,” said Nimesh Shah, managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd.
At the moment, equity funds amount to about 30% of the overall industry’s assets under management. The question is whether the incremental inflows can come into equity funds or debt funds. Sundeep Sikka, chief executive officer, Reliance Capital Asset Management Co. Ltd said that the incremental inflows will come into equity funds eventually. “I expect money to come into capital markets and mutual funds. Till now, much of this cash used to be channelled towards real estate and gold. So investors have been used to seeing gains at a portfolio level. Now if this money comes into banks, investors will not be satisfied with earning just 4% interest,” he said, adding that while the share of incremental inflows into equity funds would go up, investors would also invest in liquid and debt funds. Shah said that as deposits increase in the banking system, the fixed deposit rates would start to fall. “The influx of money will lead to deposit rates going down. Soon we should see some cut in the FD rates. This also helps allocating additional money in equity funds,” he said.
So are mutual funds gearing up their sales teams just yet? “No,” said Kalpen Parekh, managing director-sales and marketing, IDFC Asset Management Co. Ltd. “We are not focusing on direct sales. I think it is too early to put an estimate on the amount of flows that could come into mutual funds, though if you see the direction, it’s positive. We are expecting high net- worth individuals and retail investors to invest some of their cash deposits in mutual funds. If the banking sector gets more money and that leads to a drop in interest rates, it will lead to money flowing into mutual funds.”
The insurance sector will see little impact and for a short duration. “In the last few years, especially the private sector insurers have discouraged cash transactions. In fact for us, cash transaction are less than 5%. This means that people who prefer paying cash will have to pay through their bank accounts. But unbanked customers, like people in rural areas, may find it difficult to pay up in the immediate future,” said K.G. Krishnamoorthy Rao, managing director and chief executive officer, Future Generali India Insurance Ltd. But according to Rikhil Shah, senior vice president and chief financial officer, SBI General Insurance Co. Ltd, last-minute pains can be avoided if customers are proactive: “For renewals, insurers notify the customers in advance. For health insurance policies even after the due date there is a grace period of about 30 days for annual premium policies during which time the policy expires but continuity benefits are given if the premium is paid within the grace period.”
According to Shah, agency-driven policies will be hit the most as agents tend to collect premiums in cash. “Bancassurance channels collect premium online or through cheques. But agents accept cash transaction as well. So, a company with huge agency channel may see an impact. The industry will certainly see a dip in premiums in the immediate short term.”
For the life insurance industry too, agency- driven companies are likely to see an impact. “Regulations permit new business and renewal premium in cash. The non-bancassurance channels have a higher possibility of premium through cash transactions, so customers will have to start using their bank accounts. For the unbanked it’s an excellent opportunity to open their bank accounts. Life insurance companies give a grace period of 30 days during which time the cover is applicable and also give a 2-year window to revive the policy. So customers shouldn’t panic,” said R.M. Vishakha, managing director and chief executive officer, IndiaFirst Life Insurance Co. Ltd.
There are rules to prevent anti-money laundering, even as there no cap on cash transactions. For instance, customers who pay premiums in cash in excess of Rs50,000 have to furnish their permanent account number (PAN).
“Earlier, life insurance could have been a conduit for money laundering. But with anti-money laundering guidelines in place, this practice is curbed to a large extent. For our company, cash transactions are less than 3%. Over the long term this is a good move as it will bring in more formal money in the financial sector,”said Vighnesh Shahane, chief executive officer and whole-time director of IDBI Federal Life Insurance Co. Ltd. The other checks and balances against cash transaction are through tax deduction certificates. “In health insurance, if you pay premiums in cash you don’t get tax deduction benefit of 80D,”added Shah.
The hiccups faced by agency channels will be short-lived. “In the agency channel, a significant number of transactions are cash based. They would be as high as 30-35% of the overall contributing premium... Ultimately this would expedite the process of people switching from cash to plastic and using online wallets and banking...and in turn be a great boost for the consumer internet businesses,” said Yashish Dahiya, CEO, Policybazaar.com
For the pension sector, the move is being looked at as one having a long-term positive impact, even though it won’t have any immediate impact. “Most of the transactions that we get are through cheque. Basically it is not going to have a larger impact. People open an account and then remit money through cheques only. Cash is very low,” said Sumit Shukla, chief executive officer, HDFC Pension Management Co. Ltd.
A lot of cash that currently is not part of the formal banking system would come in to the system and could make more people invest in pension products. People who are looking at investments for retirement will perhaps always have a product such as the National Pension System (NPS) in their scheme of things. “But with this surplus coming in to the economy, I am sure people will think more about savings because keeping the money at home was not giving them the returns,” said Shukla. So when this amount comes in to the formal system, all products linked to the formal system will benefit from this, he added.