(Source: BloombergQuint)

BQ Explains: Why Your Nearest ATM May Be Short Of Cash

The last few days have been oddly reminiscent of the period after Prime Minister Narendra Modi withdrew old high-value notes worth 86 percent of the currency in circulation in November 2016.

What’s The Problem?

News reports from various states, including Andhra Pradesh, Madhya Pradesh, Telangana, Maharashtra and Bihar, said that ATMs were facing a cash crunch. The government and Reserve Bank of India officials attributed the shortage to unusual local demand in a few states. Finance Minister Arun Jaitley called the cash crunch a “temporary shortage”.

About 10-12 percent of the ATMs are facing the crunch, particularly for Rs 500 and Rs 2,000 notes. That will remain the case for the next five to seven days, according to the banking secreatary Rajiv Kumar.

What Could Have Led To The Crunch

There's a sudden increase in demand for cash, particularly in some parts of the country such as Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar, the finance ministry said.

According to R Gandhi, a former RBI deputy governor, the current shortage is related to local demand and supply. “Currency demand depends on occasions such as elections, festivals where we see a spike. Also, when state and central governments pay out their social welfare schemes in currency, there’s a spike,” he said.

Another reason for the crunch is that payments to farmers have gone up during the ongoing crop procurement season, according to Rajnish Kumar, the chairman of India’s largest bank State Bank of India.

Meanwhile, the Reserve Bank of India said the shortage "in some pockets" is largely due to logistical issues of repleneshing cash in ATMs frequently.

Economic Affairs Secretary Subhash Garg said there is a trend of high-value notes being hoarded as Rs 2,000 notes are being circulated but not returning to the system. “We have not got this investigated, but you can assume this is the one note which is most suitable to hoard as this is a high value note.”

The government is still analysing the reasons for the shortage reported in five states.

What's The Government Doing About It?

Finance Minister Arun Jaitley has assured citizens that the cash crunch is temporary and will be resolved soon.

The government has stepped up printing of Rs 500 notes by five times. New Rs 500 notes worth Rs 2,500 crore are being printed everyday. Around Rs 70,000-75,000 crire worth of notes will be printed in a month.

There are also Rs 1.75 lakh crore worth of currency notes in reserve.

The government is taking all steps to ensure that ATMs are supplied with cash and to get non-functional ATMs normalised at the earliest.
PIB Statement

The RBI said that printing of notes has been ramped up in all the four note presses. It is also taking steps to move cash to areas that are witnessing unusually high demand as a precautionary measure.

BQ Explains: Why Your Nearest ATM May Be Short Of Cash

Should You Be Concerned?

Probably not. The government and the RBI have both said that they are doing their best to respond.

“There is no need to panic. We have more than adequate cash and this will be supplied to ATMs and bank branches very quickly in next few days,” India’s principal economic adviser Sanjeev Sanyal told BloombergQuint.

Garg said the government generally keeps a sixth of the currency in circulation in stock, and it has the wherewithal to deal with a situation where the demand for cash in the country doubles from current levels.

The level of cash, according to the central bank, is now close to the pre-demonetisation level at Rs 18.4 lakh crore as of April 6. But in terms cash-to-GDP ratio, it’s still lower at 10.9 percent compared to 12 percent before the note ban.