The Government may have attributed the ongoing currency shortage on “hoarding”, a “shortage mentality” and a surprising surge in demand but the build-up to the current situation has triggers that go as far back as early last year.
Consider the following:
* Since April 1, 2017, nearly 48 per cent of the total currency notes supplied are lower denomination notes of Rs 200 and below, according to RBI data until December 31, 2017. During this time, RBI stopped printing Rs 2,000 notes, based on the calculation that about 3.7 billion Rs 2000 notes amounting to Rs 7.4 trillion had already been printed, the implicit view being that this has more than compensated for the 6.3 billion Rs 1,000 notes that were withdrawn post demonetisation.
* While there was a proposal to reintroduce the Rs 1000 note, this plan seems to have been jettisoned along the way. Sources said the gap between the Rs 2,000 notes and the next highest denomination, the Rs 500 currency notes, led to increasing levels of transactional hassles in the market.
* The PNB scandal that broke on February 14, 2018, when the country’s third-largest public sector bank declared that it had detected “fraudulent and unauthorised transactions” amounting to over Rs 13,000 crore at its South Mumbai branch came when state-run banks are already under the spotlight for piling up losses.
Confidence in the banking system was further dented on account of the public debate sparked by the Financial Resolution and Deposit Insurance (FRDI) Bill 2017 that is pending Parliamentary approval wherein the “resolution corporation”proposed in the draft could prevent banks from going bankrupt by “writing down of the liabilities”, a phrase some interpreted as a “bail in”.
Assurances from Finance minister Arun Jaitley that the government will fully protect public deposits in financial institutions notwithstanding, the proposed “bail in” clause in the Bill, coming at a time when the PNB scandal and the subsequent question marks of proprietary raised over ICICI Bank’s top management, impacted the level of confidence among sections of consumers in the country’s banking sector.
* The currency in circulation and with public has not kept pace with economic growth, with State Bank of India estimates showing that Indian banking system is facing a currency shortfall of Rs 70,000 crore even after taking into account increased channels of digital transactions.
Alarm bells about the impending currency shortage should have gone off in early February when Andhra Pradesh raised the red flag, well before the crisis spread to seven states and more.
On February 14 this year, the day the PNB scam broke, Andhra Pradesh Chief Minister N Chandrababu Naidu had written to Finance Minister Arun Jaitley seeking assistance from the RBI citing “a serious shortage of higher/lower denomination currency notes”.
Seeking a currency tranche of Rs 5,000 crore to mitigate the shortage, Naidu warned that a “majority of the bank branches” were running out of cash and that the “currency crisis will become very serious in the coming days when the state government will have to make salary and pension payments on the 1st of March, 2018”.
It was only on April 17 that the government admitted to the currency scare and said it had spread beyond Andhra Pradesh to states such as Bihar, Maharashtra, Rajasthan, Uttar Pradesh, Madhya Pradesh, Telangana and poll-bound Karnataka, where the rate of cash withdrawal was seen to be much higher than deposits.
A senior bank official said that the trigger for the panic can be attributed, in part, to messages circulating on social media regarding the banking sector scandals and the bail-in provision posing threats to depositors’ money.
“We are moving Rs 1,000 crore of fresh currency to Bihar to alleviate the shortfall. Assessment of the requirement for Telangana and Andhra Pradesh is also being made and a decision of how currency is to be supplied will be taken shortly,” a senior finance ministry official said.
The official said that during April 2017 to February 2018, Rs 51,523 crore was supplied to the Hyderabad office of the RBI, the highest among all offices of the RBI in the country.
The RBI supplied an additional Rs 5,000 crore of fresh currency to Andhra Pradesh after receiving the request from the state in February, he said. “Andhra Pradesh and Telangana have given a lot of cash subsidy to farmers which could have aggravated the shortage and pushed the demand to more than normal,” another finance ministry official said.
The Finance Ministry view, as enunciated by a top official, is that this spurt in demand for cash is temporary and the theory that currency in circulation has not kept pace with economic growth is a mere “conjecture”.
“There has been a sharp rise in digital mode of payments, in the number and value of electronic transactions. So the idea that we have currency shortfall from the equilibrium level does not seem accurate,” the official said. The data for last 2-3 days shows that at the national level, daily withdrawals and daily deposits at banks are nearly matching and we expect the situation to normalize very soon, he said.