ATMs running dry: Unusual withdrawal, hoarding of Rs 2,000 notes to blame?

PMO takes stock of situation; printing of Rs 500 notes to be increased five-fold; central bank to move currency to affected areas

The government and the Reserve Bank of India (RBI) have swung into action to address currency shortages in half a dozen states, caused by an increased demand due to ongoing crop procurement and the marriage season, besides non-functioning automated teller machines (ATMs).

The Prime Minister’s Office (PMO) on Tuesday held a meeting with Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar to take stock of the situation. Finance Minister Arun Jaitley described the cash crunch as “temporary” due to “unusual” demand in various parts of the country and said there was adequate supply of cash in the economy. Opposition leaders attacked the government, saying the “terror of note ban” had gripped the country and dubbed the situation as a “financial emergency”.

The RBI said there was no shortage of cash, and that logistical issues and a seasonal spurt in demand for cash were responsible for ATMs drying up in parts of the country. To meet the demand, the central bank has ramped up the printing of Rs 500 notes. “The shortage may be felt in some pockets largely due to logistical issues of replenishing ATMs frequently and the recalibration of ATMs being still underway. The RBI is closely monitoring both these aspects,” the central bank said, adding it was “also taking steps to move currency to areas that are witnessing unusually large cash withdrawals.” 

Top government officials cited several factors for the sudden spurt in demand for cash, including agricultural and marriage seasons and fear among citizens in some states due to the Financial Resolution and Deposit Insurance (FRDI) Bill, which has proposed a ‘bail-in’ clause to bail out stressed banks. 

The uneven supply of currency notes by the RBI across states and hoarding of Rs 2,000 currency notes by citizens also contributed to the cash shortage.
 

Business Standard had first reported on Friday that in the states of Andhra Pradesh, Bihar, Karnataka, Maharashtra, Rajasthan, Uttar Pradesh, Madhya Pradesh and Telangana, the rate of cash withdrawal was much more than the deposits, leading to a cash crunch, according to an analysis submitted by the RBI to the finance ministry recently.

Senior bankers said it was a cash management issue and not actual dearth of currency. “Yes, this is a temporary situation, which is mainly due to geographical factors. There is one solution for it that a proper cash management system be maintained,” Rajnish Kumar, chairman, SBI, told a news agency.

Why atms are running dry in many states

Reasons for high withdrawal

• Season of crop procurement
• Festive and marriage season
• Fears related to the FRDI Bill
• Assembly polls in Karnataka

Reasons for non-availability 

• Hoarding of Rs 2,000 notes
• Non-functioning ATMs
• Issues related to cash logistics companies

 

• Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar: States that have witnessed cash shortage in ATMs
• Rs 200 billion: Currency supplied every month on average, but it increased to Rs 450 billion during April 1-13 due to high demand
• 102%: Cash in circulation of pre-demonetisation level, but not in sync with the level of GDP growth

 

“There has been an unusual spurt in currency demand in the country in the last three months. In the current month, in the first 13 days itself, the currency supply increased by Rs 450 billion. This unusual spurt in demand is seen more in some parts of the country like Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar,” the Ministry of Finance said in a statement on Tuesday.

To give some perspective, Garg said currency supply every month is around Rs 200 billion. In the first two weeks of April, the supply has more than doubled to Rs 450 billion, indicating the demand for cash has shot up. Kumar said the situation would be normalised in five to seven days, adding the supply of Rs 500 notes would be ramped up significantly.

“Have reviewed the currency situation in the country. Overall, there is more than adequate currency in circulation and also available with the banks. The temporary shortage caused by ‘sudden and unusual increase’ in some areas is being tackled quickly,” Finance Minister Arun Jaitley said on Twitter.

 

The currency in circulation is now 102 per cent of what it was before the government had announced demonetisation of high-value currency notes of Rs 500 and Rs 1,000 in November 2016. The notes in circulation on November 4, 2016 were Rs 17.74 trillion, as against Rs 18.04 trillion now. However, the cash in circulation-to-GDP ratio before demonetisation stood at 11.6 per cent, which has now declined to 10.7 per cent. Generally, the notes in circulation grow 11-13 per cent every year. This has not happened this time and that has resulted in unmet demand for cash.

 

The currency chests of the RBI have cash worth Rs 1.75 billion, which will aggressively be moved to ATMs in the coming days. Garg said the RBI had stopped the printing of Rs 2,000 notes in the last few days as it had adequate stock of these notes (worth Rs 6.7 trillion). The government suspects that one possible reason for the cash crunch could be hoarding of Rs 2,000 notes. “Of late, we have noticed that as against the circulation, the inflow of Rs 2,000 notes back in the banking system is less. We will investigate this, but you can assume that this high-value currency note is the most suitable one to hoard,” Garg said.

A source in the know of RBI working said the central bank had stopped or slowed down the printing of Rs 2,000 notes. Instead, the central bank wanted to increase lower denomination notes, and that had created the present crisis as the replacement was not easy, the source added. An RBI official said usually there was the cash shortage problem at the start of the financial year due to festivals such as Bihu, Vishu, Sankranti, Bengali New Year etc, which pushed up localised demand for cash. “The RBI is working with banks to sort out logistical issues. Banks have been asked to work with their cash management companies to supply adequate cash in affected areas,” said the official. 

Senior public sector bank executives said the Indian Banks’ Association (IBA), a lobby group of bankers, had written to the RBI about the cash crunch being faced by branches in some parts of the country. A senior banker said cash hoarding might have been happening in parts of Karnataka due to the upcoming Assembly elections.