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India’s cash machines are running dry as the country suffers a shortage of banknotes. The shortage has occurred less than 18 months after the prime minister’s disastrous “demonetization” policy. Banks in several states admitted that their ATMs had no cash to dispense and no way to refill them. The finance ministry has been forced to begin talks with the Reserve Bank of India (RBI), the country’s central bank, and several lenders to try to resolve the crisis.
Many of the counters have run dry in states like Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh, Gujarat, Uttar Pradesh, Bihar, and Manipur. People are seen forming long queues outside the facilities, so much so that banks have had to impose restrictions on withdrawals so as to deter people from hoarding money.
The Narendra Modi Government is still ascertaining the reasons for the crisis. It has zeroed in on “unusual demand” as the prima facie cause. The central bank believes it is primarily a logistical issue, with non-replenishment of ATMs being the crux of the problem. Images of shuttered ATMs and helpless citizens have been making the rounds on Indian media, reminiscent of the aftermath of Prime Minister Narendra Modi’s shock announcement in 2016 banning 500- and 1,000-rupee notes.
Concerns about public sector banks were further fanned in February when Punjab National Bank, the second-largest state lender, announced it had uncovered an alleged $2bn fraud involving a celebrity jeweler.
Modi said at the time that the move was intended to combat widespread tax evasion and digitize India’s economy, though experts continue to debate whether those goals were achieved. The ban removed 86% of the country’s currency from circulation at a stroke, and threw the cash-dependent economy into turmoil for weeks. Some ATMs are still being retrofitted to take the new 200-, 500- and 2,000-rupee notes that replaced the banned cash notes and that may have contributed to the current shortage.
The central bank — which came under fire for its handling of the aftermath of the cash ban — said there was “sufficient cash in the RBI vaults and currency chests”, but said that printing of notes would be “ramped up” at its four currency presses. It also said that it was “taking steps to move currency to areas which are witnessing unusually large cash withdrawals”. India finance ministry said on Tuesday that there had been an “unusual spurt in currency demand in the country in the last three months”.
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Currency in circulation increased by almost $7bn in the first 13 days of April, the ministry said, with “extraordinary demand” for cash in several states, including Karnataka where state polls will be held early next month. The ministry pledged to supply “adequate currency notes to meet even higher levels of demand if such demand were to continue in the coming days/months”. Authorities said the printing of new banknotes could be accelerated if needed.
The Government offered no explanation for the increased demand. But Saurabh Mukherjea, chief executive of Ambit Capital, suggested the country was seeing a rapid unwinding of the effects of demonetization — with an attendant tightening of liquidity in the financial system — as Indians reasserted their traditional preference for cash.
Images of shuttered ATMs and helpless citizens have been making the rounds on Indian media, reminiscent of the aftermath of Prime Minister Narendra Modi’s shock announcement in 2016 banning 500- and 1,000-rupee notes.
“It’s a natural process,” he said. “You artificially took people’s money by diktat and put it in the bank. Now people have been given a chance to take the money out of the banks and turn it into cash and they have done so.” Rajnish Kumar, chairman of the State Bank of India, said the surge in cash demand might have been fuelled by seasonal payouts to farmers for crops being procured before the summer.
But New Delhi told reporters that authorities would examine bank withdrawals made over the past three months. Many analysts have speculated that surging cash demand was linked to upcoming elections, with three large northern states holding elections later this year and national polls due in early 2019. Indian elections are typically cash-intensive as candidates use currency to flout campaign spending limits and woo voters.
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However, Indian circles have also been rife with rumors that India’s public sector banks are on the verge of collapse because of their non-performing loans, despite a $32bn government bank recapitalization programme and central bank assurances that the sector is sound.
Concerns about public sector banks were further fanned in February when Punjab National Bank, the second-largest state lender, announced it had uncovered an alleged $2bn fraud involving a celebrity jeweler.