RBI

Why Won’t You Accept My 10 Rupee Coin?

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The 10 rupee coin seems to be out of favour with the general public. It is getting increasingly difficult to use it as a means of payments. Vendors and customers are refusing to accept it. The Business Line reports: “From roadside vendors to even beggars, people have started saying a polite ‘no’ to the Rs 10 coin”. The problem is that many people believe that the coin is no longer legal tender. The RBI has issued multiple circulars and notifications urging people to accept the coin and reaffirmed the legality of the coin. Even banks have begun to refuse the coin as they have no space to store them, reports The Hindu.

Fiat money works on trust. Trust in this case takes two forms – trust in the government that has issued the currency and trust that the others in the system will accept the currency as a payment method. With the 10 rupee coin, both forms of trust are rather low. Social media and Whatsapp have had its role to play in spreading rumours about the coin. The RBI even tackled this in one of its notifications:

It has been reported that some less-informed or uninformed persons who suspect the genuineness of such coins are creating doubts in the minds of ordinary people including traders, shop-keepers, etc., impeding the circulation of these coins in certain pockets of the country causing avoidable confusion.

The Reserve Bank has advised members of the public not to give credence to such ill-informed notions and ignore them and continue to accept these coins as legal tender in all their transactions without any hesitation.

Payment systems and currencies have huge network effects. It gains value with more number of people using it. A currency in circulation gains acceptability based on its intrinsic value and the expectation that a large number of people will accept it as a form of payment. There are known instances where cigarettes have been used as currency in prisons because everyone else agreed on its value. In today’s fiat money system, the currency has no intrinsic value; only a government mandate declaring it as legal tender. The currency gains value because everyone else uses it.

However, in the case of the Rs 10 coin, no amount of government (RBI) assurances and orders has managed to infuse trust. Wonder if this is another side effect of demonetisation?

The Logistics of Cash

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I was in Budapest recently for a conference on the relative importance and usage of cash and non-cash methods of payments. The primary message from the conference was that cash is reliable, secure, and accessible to people. It was organised by a non profit organisation that is an association of companies dealing with cash management. Before heading to the conference, it seemed strange that there would be multiple companies involved in cash management and logistics in a country. We largely tend to take cash for granted and do not think about the vast logistical network that exists behind the usage of cash.

Here’s a brief glimpse into the fascinating world of cash logistics and management:

First, you would need specialised paper to print the notes on, which is supplied by few companies in the world. The material on which the notes are printed differ from country to country. India uses a pulp made of cotton and balsam, whereas the US dollars are made of cotton and linen. Australia, and a few countries, have shifted to an innovative polymer (or plastics).

The ink used to print the notes are also highly specialised and secure ink that does not get worn out easily. The ink would be made from a special dye that is not available to anyone except the central bank. Then, comes the host of security features, such as the hologram, watermarks, security threads, serial numbers, anti-copy marks, magnetic ink and microprinting. Each of these would be manufactured and supplied by a set of private companies, according to the central banks’ specifications.

Then, for distribution, you would require armoured vehicles to move the cash from the vaults of the reserve banks to the commercial banks and finally to the ATMs. There are private companies that specifically design these armoured vehicles and provide security guards as well. You also need specialised large vaults in commercial banks to store the currency. There are also machines developed exclusive to count the currency notes.

There are companies that manufacture and distribute ATM machines and who maintain them. A separate company would take charge of managing the ATM machine and making sure that they have enough cash to distribute. On the retail side, you have companies that manufacture tills to hold temporary cash required at point of sale. Of course, the complexity of the business determines the level of sophistication required for the cash handling machines. A Casino will require a more customised and complex machine to handle and store cash, as against a corner retail store selling milk. There are also companies that manufacture paper rolls for till and ATM receipts.

This is just a sample of the number of companies involved in cash management in a country.

P.S: I am reproducing the steps involved in cash printing and distribution in India from this Business Standard article:

HOW MONEY TRAVELS: PRESS TO PURSE

* The Reserve Bank of India (RBI) chalks out the requirement for currency notes before the start of the financial year

* The requirement is then communicated to the government

* When the government gives permission to RBI, the central bank raises ‘indent’ or order for printing specific bank notes to four presses

* Papers for banknotes were earlier procured from overseas but now the material is supplied locally

* The security features are installed by the mills first and then sent to the printing presses

* The printed notes are sent to RBI’s 19 regional offices

* There are 4,000 currency chests where the notes are kept

* RBI then raises a voucher for the notes needed

* Banks raise their demand for cash with RBI’s regional offices

* RBI then sends money to banks

* Banks keep the money in their currency chests and engage cash management firms to fill the ATMs

* ATM service providers do a daily calculation of cash required at night for the next day, called indent

* Banks validate the indent and the cash is transferred to the bank branch linked to that ATM

* These bank branches generate their own cash and in case of shortage, they borrow from currency chest

* Cash management companies transfer cash from branches to ATMs

* The companies fill up the ATMs with four ‘cassettes’, which can hold up to 2,500 notes each

* The money is dispensed when customers use their card

No sermons, no carrots, only sticks

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The Reserve Bank of India on April 6th prohibited banks from:

dealing in Virtual Currencies or from providing services for facilitating any person or entity in dealing with or settling Virtual Currencies.

This is not strictly a ban on people from mining bitcoins or possessing them. Perhaps, it’s not even possible for RBI to enforce that ban given the decentralised nature of cryptocurrencies. Nevertheless, prohibiting banks from dealing with any cryptocurrency is symptomatic of how quickly governments resort to blunt policy instruments in India.

Carrots, Sticks, and Sermons has a wonderful classification of policy instruments. It argues that any government primarily has three policy instruments available to it: information (moral suasion, transfer of knowledge, communication of reasoned argument, advice, and persuasion etc), economic instruments (grants, subsidies, charges, fees etc), and regulation (absolute bans, prohibition with exemptions, obligation to notify etc).

Now, which of these three policy instruments should governments choose? The book has this to say:

All other things being equal, in most cultures at least, the use of coercive power is more alienating to those subject to it than is the use of economic power, and the use of economic power is more alienating than the use of information and exhortation. Or, to put it the other way around, exhortation and information tend to generate more commitment than economic instruments, and economic instruments more than regulatory instruments.

The book says that even politically, it is rewarding if these three instruments are applied in a sequence:

politicians have a strong tendency to respond to policy issues (any issue) by moving successively from the least coercive governing instrument to the most coercive. The idea is that over time a policy problem is tackled in three different ways: first by the provision of information such as uttering a broad statement of intent, subsequently by the application of selective incentives, and lastly by the establishment of regulations accompanied by the threat of sanction. The underlying notion is that in solving social problems the authorities employ instruments of increasing strength in successive stages.

But is this order followed in India?

It would take a thorough study to investigate this. But if the regularity of prohibitions is taken as an indicator, it appears that even if this order is adhered to, the predilection in Indian policymakers is to pick the coercive option fairly quickly. And this says a lot about India. It can be taken as a proxy for how liberal political philosophy is stillborn in India. A liberal society would default to a minimal constraint principle – cause as less trouble to the populace as possible. Policy instruments are ends in themselves as they determine the style of policymaking in a polity. So, a high number of bans and prohibitions indicates that at the margin, greater government control is the default in India. Seen through this lens, the RBI note does not surprise.

Banning Cryptocurrency is a Terrible Idea

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The RBI released a notification recently on virtual currency. In essence, the central bank is trying to ban cryptocurrency in India:

In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs.

For those who are already engaged in the practices mentioned above, the RBI has given them three months to exit it.

This form of blanket ban has been feared for sometime. There were whispers that such a daft move would be done and the RBI didn’t want to disappoint. They have carried out the ban in order to protect consumer interests, market integrity and to prevent money laundering.

There are several problems with this:

  1. Ineffective: Such a ban will be completely ineffective. By its very nature, and as the name suggests, cryptocurrencies are hard to track and provides anonymity for its users. How does the government actually plans to ban it?
  2. Loss of control: By not banning it, RBI had a better chance of regulating some aspects of cryptos. Now, it has lost all control and all the transactions will go underground. Those who want to use Bitcoins will continue doing so by using cash, or other discreet financial instruments to trade. And as Rahul Matthan says in his editorial, “The only people who abide by the terms of a ban are those who always intended to use the service for legitimate purposes”.
  3. You can’t have one without the other: The government, it seems, is quite keen on developing and using blockchain technology for various public purposes, such as maintaining land records, public health records, etc. However, the best use case of blockchain is cryptocurrencies. By banning one, there will be no innovation and test cases of blockchain in India.

It will be interesting to see how this pans out. My guess is that RBI will soon realise that it has no control over this and will backtrack on this move. However, it might have already set a bad precedent and the narrative that these are inherently dangerous and risky.