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People have been busy changing the old notes
People have been busy changing the old notes

With the cash crunch at bank branches expected to persist on Thursday, the government has moved to further scale up the printing of Rs 500 notes , hoping that the new stock of the elusive currency will ease the situation in the next few days. Banks across the country continued to face cash shortages and most of them ran out of money early in the morning on Wednesday.

Private banks had a tough time dealing with cash shortage and industry data showed the supply was sharply reduced. Sources said the four currency printing presses, two owned by RBI at Mysuru and Salboni, and two government-owned ones at Nashik and Devas, which were operating two shifts, have now started working three shifts. The focus now is on augmenting the supply of Rs 500 notes , the sources said.

Many bank branches wore a deserted look on Wednesday as they ran out of cash. Branches of smaller banks did not receive any cash while larger banks with currency chests got a fourth of their requirement. In Mumbai, several branches were functioning with half shutters down to send a message that they were out of cash.

The Indian economy has become poorer by Rs 5.8 lakh crore since November 8 because of decline in currency in circulation and the reserve money, shows data released by the Reserve Bank of India. Currency contraction because of demonetisation could squeeze the economy further as it could lead to payment delays and defaults, say experts.

The reserve money or the high-powered money, a bulk of which comprises currency in circulation and bank deposits with the Reserve Bank of India, contracted 12.4% or Rs 2.3 lakh crore for the week ended November 25. The currency in circulation alone dipped 16.8% or Rs 2.4 lakh crore during the week. For the period since November 8, the total contraction in currency is estimated to be Rs 5.8 lakh crore because of scapping of old Rs 500 and Rs 1,000 notes.

However, with RBI resortiong to a temporary measure of imposing a 100% cash reserve requirement on incremental deposits generated by banks since November 1, negative impact of currency contraction is likely to get neutralised.

“For us, 33000 ATMs are currently dispensing cash. More will come up as day proceeds. You need to talk to RBI (Sic),” said SBI chairman, Arundhati Bhattacharya on Wednesday, when asked how long the cash-shortage will last in ATMs and how well the banking system is ready to face the week when salaries get credited to employee accounts and people rush to ATMs/ branches to draw money.

Presently, SBI has about 49,000 ATMs. If 33,000 ATMs are dispensing money, that means about 67 percent of the ATMs of the country’s largest lender (by assets) are dispensing money. Let’s assume that rest of the banks too have managed to fill in cash in at least 50-60 percent of their teller machines. Things must have improved. But, then you can’t fool your eyes. A good number of the 2 lakh ATMs in the banking system continue to remain cash-starved even after three weeks of demonetisation announced by Prime Minister Narendra Modi and there are still stories of pain in daily lives.

Both the Reserve Bank of India (RBI) and the government have been assuring the public that there is enough cash in the banking system and there is no need to panic. Then why do we still see continuing cash shortage on the ground?

The reason is simple. There isn’t enough lower denomination notes (Rs 500 and below) to go around. The government mints have been aggressively printing Rs 2,000 notes, whereas the printing of Rs 500 notes, which is more handy to the common man for daily transactions, is a scarce item. Bhattacharya too attributed to the continuing cash crunch to the shortage of Rs 500 notes.

On 13 November, Modi had sought 50 days from the public to tide over the hardships post the demonetisation. But, can the PM keep his promise? At this stage, it looks doubtful. Most bankers, economists and financial sector experts said that the cash crunch could last at least until March (three more months beyond what the PM sought) for things to return to normal. A recent report in the Quint, says that the printing of the new Rs 500 note has come to a near-halt at the government’s Nashik and Dewas mints.

Long lines still persist outside the banks
Long lines still persist outside the banks
The report, which quoted RBI sources, attributes a series of errors on the new Rs 500 notes and the low printing capacity of Nashik and Dewas presses as the reason that promoted the RBI and the government to call off printing of Rs 500 notes. Firstpost hasn’t verified this information independently. But, if indeed this report is true, we are looking at even more delay for the Rs 500 notes coming in sufficient numbers to the rescue of common man. But one needs to wait and watch how the scenario unfolds.

“The situation is pretty bad. It shall take 5-6 six months before we reach normalcy,” former RBI deputy governor KC Chakrabarty told Firstpost.

Indeed, the government’s hurry to print the stock of Rs 500 notes and the lack of preparedness while doing so was evident when two versions of Rs 500 notes appeared in the public. There were printing errors on certain features like the shadow of Mahatma Gandhi’s picture, placement of the national emblem, colour shade and border size. This shows nothing but lack of preparedness by the central bank as far as Rs 500 notes are concerned.

In the coming days, the scenario could turn even tougher for banks given that salaries will get credited to employee accounts and to draw this money, there could be long queues before ATMs and bank branches.

What will likely add to the pain is the hoarding tendency of people till the time cash withdrawal limits stay. As of now, there is a weekly withdrawal limit of Rs 24,000 at branches and Rs 2,500 daily limits at ATMs. Even Jan Dhan account withdrawals have been capped at Rs 10,000 a month, as a temporary measure. All this would mean that the public who draw cash at ATMs and bank branches would be hesitant to spend it except for basic necessities. When the speed of the circulation of the money is slow, that will add to an artificial cash shortage. That is even the money printed out of mints wouldn’t return to the system fast.

This, in other words means, banks will struggle to fill up their ATMs and permit higher withdrawals. Even now, most banks are seeking the KYC details of their own customers who come to the counter to withdraw money, to ensure the person is the account holder and the need is genuine. But, beyond a point, banker at the counter cannot keep doing this. Until the government presses churn out sufficient number of cash units into the system, the RBI would not be in a position to remove withdrawal restrictions for public. More withdrawal restrictions, such the current one on Jan Dhan accounts, signal danger to the common man and tell him the problem persists and he needs to be cautious with the cash in hand.

For now, the most optimistic assessments show the cash situation to turn normal only by March at the earliest, that is if the four government printing presses work in full capacity in three shifts.

That could be a long time for a country like India.