Banks Assure Of Adequate Cash Supply But Where Is The Data?

The government, the Reserve Bank of India and now bankers are coming out in full force to assure citizens that there is no shortage of cash in the economy. But no one is providing any data on how close to normal the situation is.

There is no shortage of currency in the country but it has taken time to manage the logistics of cash replacement, said Chanda Kochhar, chief executive officer and managing director of ICICI Bank in an interaction with BloombergQuint on Friday.

Eighty-six percent of the currency was withdrawn last Tuesday, leaving the country's banking system scrambling to meet demand for fresh currency and also to arrange for the collection of old currency notes. New notes of Rs 2,000 and Rs 500 are being printed but the government and the Reserve Bank of India have declined to say how many notes have been printed and put in circulation.

On Thursday, the Reserve Bank of India asked citizens not to hoard cash and assured them that there is adequate supply of banknotes. “Enough cash is available”, Economic Affairs Secretary Shaktikanta Das told reporters.

Kochhar’s message was similar.

While replenishing cash in metro and urban areas has been easier, anecdotal reports suggest that the availability of cash in rural areas is far from normal. ICICI Bank, which has 2,294 branches in rural and semi-urban areas, says that rural branches have been operational since the day banks reopened after the demonetisation announcement.

According to Kochhar, the bank has also mobilised banking correspondents to improve the availability of cash.

The Rush At Bank Branches

In the days after the demonetisation announcement, consumers rushed to exchange old currency which led to a surge in footfalls across the bank's branches, said Kochhar.

Citizens were given until end of December to exchange any old notes at bank branches and post offices. Customers, however, were only allowed to get Rs 4,000 in cash in return for the old notes initially. This was later revised upwards to Rs 4,500 and then downwards to Rs 2,000. The government has also asked banks to use indelible ink to prevent misuse of the exchange facility.

Withdrawals, however, are far from normal. A cap of Rs 2,500 on ATM withdrawals and Rs 24,000 per week on branch withdrawals remains in place.

Economists fear low availability of cash will hurt consumption activity and could impact GDP growth by as much as 1 percentage point over the course of a year with the near term hit likely to be the steepest.

Kochhar, however, feels that the surge in digital transactions should be considered while trying to gauge the level of economic activity.

One of the reasons for low availability of cash is the need to recalibrate ATMs to allow them to dispense the new currency notes.

ICICI Bank did not specify the number of ATMs that have been recalibrated but said that the process is now being managed centrally by the RBI. The run rate across the industry suggests that about 12,000 ATMs are being recalibrated daily.

Impact On Asset Quality?

The decision to demonetise has also led to some volatility in collection of dues for small ticket loans to small and medium enterprises and microfinance borrowers.

This has led to worries about the impact on asset quality if the cash situation doesn't normalise quickly.

Kochhar said that collections had actually increased initially but added that the situation needs to be watched. Some bankers have suggested that the RBI may need to provide temporary forbearance on such loans even though the regulator has not hinted at any such allowances.

"It’s too early to say whether forbearance would be needed. I am sure the regulator is watching the situation," said Kochhar.