Ahead of monsoon, rural economy at risk of slowdown over cash crunch

Farmers are facing huge problems in getting loans. For example, at the Amreli cooperative bank in Gujarat, loan disbursements are 90% less than usual, says Dileep Sanghani

With cash transactions routed through banks taking a hit due to a cash crunch, the rural economy is at the risk of a slowdown ahead of the monsoon. More so in Uttar Pradesh, Andhra Pradesh, Telangana, Maharashtra and Gujarat.

Post-harvest rabi and pre-kharif loan offtake, typically around April, have been lower by as much as 50 per cent in several states. In southern states, where chit funds are popular instruments for investment in rural areas, defaults have risen. According to bankers, if the cash crunch persists, payments under the Mahatma Gandhi National Rural Employment Guarantee Scheme would be hit.

"Rural branches in some states are fast running out of cash.If this continues, timely MGNREGS payments might be a problem," said a banker with a public sector institution.

"Farmers are facing huge problems in getting loans. For example, at the Amreli cooperative bank in Gujarat, loan disbursements are 90 per cent less than usual. We have written to the Reserve Bank and the finance ministry for steps to ease cash supplies for rural lending," said Dileep Sanghani, chairman, National Federation of State Cooperative Banks.

Cooperative banks in Telangana say they face a cash crunch. Most of the cash being given to customers is mostly in Rs 10, Rs 20 and Rs 100 denominations.

According to Karimnagar District Cooperative Central Bank (KDCCB) chief executive Satyanarayana, they have been barely able to meet the cash requirement, paying only a fraction of what customers have been asking. "We had got Rs 40-45 crore cash in the month of March as part of loan recovery from farmers. We are using this cash in small quantities to run day-to-day operations, while following some sort of rationing in disbursement to customers. Even then, cash at our disposal is fast dwindling," he said.

With the paddy procurement season approaching, things could get worse. Last year KDCCB procured paddy worth of Rs 11 billion from farmers. It had to pay the money in cash. This time, it plans for only half of what it had procured last year. Even for that, it needs Rs 5-6 billion.

The district bank had also borrowed Rs 30-40 million from ICICI Bank and IDBI Bank. " Every bank and every place is facing a cash crunch, not only in Karimnagar," Satyanarayana told Business Standard.

In Karnataka, rural bank branches are running out of cash, leading to delays in loan disbursal to farmers, said T M Chandrashekarariah, vice-president, The Karnataka State Cooperative Apex Bank.

Regional Rural Banks say they plan to write to the government on the problem. "After demonetisation, over the past year, the growth in deposits in RRBs have been less than six per cent, against the usual 15 per cent. The net effect is that banks are having negative deposits. The cash situation across RRBs is precarious and if the government doesn't intervene immediately, the impact would be severe. We will take up this matter with the finance ministry shortly," said A Sayeed Khan, general secretary, All India Regional Rural Bank Employees Association.

In Chhattisgarh, cash supply in rural areas are down by almost 85 per cent, said sources in the banking sector.

T S Sivaramakrishnan, general secretary, All India Association of Chit Funds, said while the segment was yet to come out from the challenges and losses after demonetisation, the cash crunch was adding to the pressure. Defaults had increased, with payments down 10-20 per cent. Cusotmers or chit fund entities, both rely on banking channels for day-to-day needs, due to a legal cap on cash transactions. On a day-to-day basis, the segment used to transact business worth around Rs 1.2 billion.

Notably, microfinance institutuons (MFIs)companies are relatively untouched by the crisis, as they have remained shy of depositing cash at banks. Earlier, banks would frown upon MFIs when the latter would come with cash and coins to deposit' now, it appears, they are being encouraged by the banks, as that is where they get cash now, said an MFI executive.

Joby C O, Chief executive at Varam Capital, a new-generation MFI, said many of these institutions deposit their daily collection with banks; disbursement would happen through banking channels. However, MFIs are now bypassing banks and disbursing their collections directly to customers.