Why There Is A Cash Crunch

The great Indian cash crunch story has two aspects to it – a supply mismatch coupled with a demand spurt. As automated teller machines, or ATMs, ran dry across some states and panic created by news about money-less ATMs further stressed the cash dispensing system even in places where there was no shortage to begin with, it is pertinent to remember that cash management is the sole prerogative and responsibility of the Reserve Bank of India. And it seems to have fallen behind in projecting how much cash to pump into the system, how much to provide at each location, and in what denomination.

Not to speak of the fact that the central bank seems to have been caught off guard by a sudden spike in cash withdrawal – what the government calls currency “hoarding”. It ought to have better data, better understanding of the way Indians deal with currency, and what fuels cash-crunch fears. Now more than ever, since one round of demonetisation and the severe currency crunch that decision unleashed, is likely behind us.

As reports started pouring in about dry ATMs across states like Andhra Pradesh, Telangana, Jharkhand, Madhya Pradesh, parts of Maharashtra (Vidarbha region), Karnataka, Gujarat, and Bihar in the last few days, there was a widespread feeling that the terrors of demonetisation are back. These fears appear unfounded, as cash shortage will likely be addressed by the RBI sooner rather than later. The government and the RBI have repeatedly said that there is enough cash available with the currency chests at the central bank and they are expediting the process by which cash reaches those parts of the country which seem to be in the grip of the shortage.

“Nevertheless, printing of the notes has been ramped up in all the 4 note presses. 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. RBI is closely monitoring both these aspects. Further, as a matter of abundant precaution, RBI is also taking steps to move currency to areas which are witnessing unusually large cash withdrawals”, the RBI said in a statement earlier this week.

If there is enough currency with the central bank, why the scare?

Thyagarajan Seshadri, spokesperson for Electronic Payment and Services (which offers end-to-end ATM operations and management services), said only 35-40 per cent of the indent his company has been raising with banks (to fill up in ATMs) is being provided for those locations where cash shortage has been reported. “We raise indents based on historical dispersal pattern of each ATM…normally banks give us 60-70 per cent of the indent raised but in some locations now, we are being given only 35-40 per cent. Banks are saying they do not have enough cash and the RBI needs to supply more at these locations.”

Seshadri also pointed out that the average ticket size for ATM withdrawals has increased in the last seven to eight months, as people are withdrawing more cash at certain locations. The shortage of cash is not uniform, some states also have “surplus”, said Seshadri.

In a nutshell, this is the cause of the present shortage:

1) According to CNBC-TV18, the RBI first put out an estimate in February last year, of the number of currency notes to be printed in 2017-18 at 33 billion. But then, it drastically reduced this number to 20 billion notes by June of the same year, and again, changed its mind to bring the number back up to 33 billion notes. But by the time it changed its mind a second time and restored the printing order to 33 billion notes, the various currency printing presses had already finished ordering the quantities of ink and printing paper needed to print 20 billion notes. The net result of this back-and-forth on notes’ order was a severe shortage of essential printing material and a likely shortfall in the actual printing of notes last fiscal.

2) There has been an unusual spike in currency demand. RBI data suggest that as of 2018, 39.2 per cent of the currency was lying with the pubic against 20.8 per cent in 2017 (due to demonetisation), 15 per cent in 2016, and 10.8 per cent in 2015. Why the public is “hoarding” currency is not clear, with a myriad reasons being given out, including annual fiscal-end payouts in April, harvesting season, festivals, and the impending polls in Karnataka.

3) Ambiguity over the status of printing of Rs 2,000 notes. Since no one quite knows whether fresh ones are being printed (and whatever number of such notes are in the system already are not coming back due to alleged “hoarding”), this is creating its own set of problems. The public is forced to withdraw lower denomination notes and this obviously means more transactions besides less money being loaded on to ATMs, where recalibration is taking time. Recaliberation is necessary for ATMs to dispense the Rs 200 note.

4) As this piece explains, recent changes introduced by the RBI include stipulations such as asking banks to have minimum standards in their arrangements with the service providers for cash management-related activities by July. These include a minimum fleet size of 300 specifically fabricated cash vans (vehicles), a driver, two custodians, and at least two gunmen for security; each vehicle must be global positioning system-enabled and monitored live with geo-fencing mapping with additional indication of the nearest police station during any emergency. The result is an increase in cost for cash logistics providers and a slower-than-usual transportation of cash.

Though there are both supply and demand factors at play for the current cash crunch, there is little reason to panic. The government and the RBI are seized of the matter and have promised a five-fold increase in currency printing besides expeditious supply to affected areas.