phone icon +44(0)203 915 8111

Category: Money

India losing out to cash shortage

India’s government and banking institutions are struggling to allay money fears and keep citizens liquid as the country’s cash machines run dr...

19 April 2018


India’s government and banking institutions are struggling to allay money fears and keep citizens liquid as the country’s cash machines run dry  

India is facing a monetary crisis as ATM machines across the country run out of money leaving the populace cash short. The shortage prompted India’s finance minister, Arun Jaitley, to promise extra printing of bank notes, claiming that while “there is more than adequate currency in circulation and also available with the banks,” his department were working to get regional shortfalls “tackled quickly” following the withdrawal of $7 billion of currency in the first 13 days of April. Rural areas and smaller towns and cities seem to have suffered most.

[in_post_ads postid=”8784″]

The money shortage has drawn comparisons with the sudden removal from circulation of the 1,000 and 500 rupee notes in 2016. Indeed, the sudden demand for cash is being linked to a rise in the redemption of people’s money from banks – possibly because they fear being left illiquid if another monetary diktat is issued.

The amount of currency now in circulation is back to the level of $284 billon, roughly the same as before the shock re-monetisation but, following strong economic growth, the cash-to-GDP ratio has fallen to 10.9%, compared to 12% in 2016.

No official explanation has been given but the CEO of Ambit Capital, Saurabh Mukherjea, told The Financial Times that India was seeing a reversion to a preference for hard currency: “It’s a natural process. 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.” Arguably this is being compounded by the seasonal need to pay farmers in rural areas, requiring large amounts of currency.

A number of other theories also abound. Some link the need for cash with the desire to traverse campaign spending rules ahead of local elections in three northern states. Others say public sector banks are on the verge of collapse, or that people are simply hoarding cash as a precaution rather than spending it.

[in_post_ads postid=”8784″]

Confidence in banking institutions is at a significant low. A new clause in a recent law allegedly says those depositing money in state banks will bear the brunt of any bad debt. While Shikha Sharma the CEO of Axis Bank, India’s third largest in the private sector has offered to step down following an RBI investigation into under-reporting of bad loans. Chanda Kochhar, CEO of  ICICI Bank’s is also under investigation. Meanwhile the Punjab National Bank is also reeling from a scandal involving billionaire Nirav Modi.

“Even though India is growing at a phenomenal pace, you still don’t have the regulatory frame work common in the developed world,” one fund manager told Glint. “What you have could be framed as a bank run in some respects as people withdraw their cash simply because they don’t trust the banking system. In the UK the government guarantees deposits up to £85,000, the same is not true in India.”

There have been reports of a number of raids by the state on hoarders, while the Times of India reported a sharp rise in the use of mobile wallets companies such as Paytm, Mobikwik and PhonePe. “In the wake of the ongoing cash crunch, customers are using more of our services, which has led to phenomenal growth in money transfers and QR-based payments in the cities where the ATMs have gone dry,” Paytm COO Kiran Vasireddy told the paper.

Notably, India is one of the world’s biggest markets for gold, with imports rising by 67% last year.

Image top: A trader counts her money at a bazaar in Uttar Pradesh, India

[in_post_ads postid=”8784″]

Sign up to get the latest Glint news

Receive the GLINT newsletter with the most popular content, platform updates and software guides.