Cash Crunch Is Ugly Face of India’s Bank Morass

22. April 2018.

Among the many theories being advanced to explain a shortage of currency in parts of India, a rotten-to-the-core banking system is the one hypothesis nobody wants to talk about.

ATMs have run out of cash in a number of Indian states. Yes, farmers need to be paid for harvests; and next month’s elections in Karnataka state will have to be fought by spending banknotes. The central bank has spoken about some areas “witnessing unusually large” withdrawals. And as always happens in these situations, news that there’s a deficit somewhere could be prompting people even in unaffected areas to take more money out of their accounts than they need to.

It’s speculated that 2,000-rupee notes — the highest denomination — are being hoarded. Banks, meanwhile, have been slow to calibrate cash machines to handle the new 200-rupee bill. 

Then there’s a possible demonetization effect.

More Cash, But Not Enough

Reports of ATMs running dry in many parts of India have sparked fears of a shortage of banknotes

Source: Reserve Bank of India

Even as late as September, banknotes in circulation amounted to 16 trillion rupees ($242 billion), or about 3 trillion rupees less than what the economy would have needed if an abrupt ban on most of the currency circulating in November 2016 hadn’t interrupted the trend growth of cash use, according to Nomura Research.

Since September, though, that gap has halved, suggesting that the shift in people’s preferences to digital payments may have been temporary. By believing in their own “less-cash society” propaganda, the authorities may have supplied smaller amounts of currency than people actually wanted. Now they’re scrambling to keep up.

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