Despite widespread chaos, bank runs, tumbling currency, and economic uncertainty in India following its surprise announcement last week, UBS analysts think Australia should follow India’s lead and scrap its biggest bank notes, extending the war on cash further across the globe.
The war on cash really began to escalate in February when The European Central Bank said it was considering withdrawing 500-euro notes because of an “increased conviction in world public opinion” such high-value notes are used for criminal purposes.
And as a reminder, here is what happened in India this week after they abolished large denomination banknotes, (via Reuters)...
Anger intensified in India on Saturday as banks struggled to dispense cash following the government's decision to withdraw large denomination notes in an attempt to uncover billions of dollars in undeclared wealth.
Tempers frayed as hundreds of thousands of people queued for hours outside banks for a third day to swap 500 and 1,000 rupee bank notes after the notes were abolished earlier in the week.
The banned bills made up more than 80 percent of the currency in circulation, leaving millions of people without cash and threatening to bring much of the cash-driven economy to a halt.
"There's chaos everywhere," said Delhi Chief Minister Arvind Kejriwal, a rival of Prime Minister Narendra Modi, accusing the premier of wreaking havoc on poor and working Indians while the wealthy found ways to skirt the new rules.
Customers argued and banged the glass doors at a Standard Chartered branch in southern Delhi after security guards blocked the entrance, saying there were too many people inside already.
And now, as Bloomberg reports, UBS analysts thin Australia should follow the same path towards abolishing banknotes...
“Removing large denomination notes in Australia would be good for the economy and good for the banks,” UBS analysts led by Jonathan Mott said in a note to clients on Monday. Benefits would include reduced crime and welfare fraud, increased tax revenue and a “spike” in bank deposits, he said.
In Australia, 92 percent of all currency by value is in A$50 ($38) and A$100 notes, the larger of which is “rarely seen,” according to the UBS report. Removing bigger denominations would boost digital payments in a country where the use of cash payments is continuing to fall, the analysts wrote.
Since 2009, ATM transactions in Australia have fallen 3.4 percent a year, while credit-card transactions have increased 7.3 percent a year, UBS said.
The program would also be positive for banks. If all the A$100 notes were deposited into accounts at the lenders, household deposits would rise by about 4 percent, the UBS analysts said. That would likely be enough to fill the big banks’ regulatory-mandated net stable funding ratios and reduce reliance on offshore funding, they said.
We have one warning for all those pushing the war on cash - and using the "coorruption" excuse - be careful what you wish for... trust only lasts so long. As Devashang Datta concludes,
Our entire monetary system depends on trust. A banknote is a piece of paper that says the RBI will give the bearer another similar piece of paper, or make an entry in an electronic ledger for that amount. The system works because everybody believes that those pieces of paper will be accepted by everybody else and therefore, money serves as an useful medium of exchange. This move has shaken that trust.