Cash Crunch in ATMs

What is the issue?

• Shortage of cash across ATMs has been noticed in some states.
• But experts have stated that this was largely a logistical challenge rather than a supply shortage.

Why is there a shortage of cash in ATMs in some states?

Multiple reasons have been stated for shortage of cash at ATMs:

• Printing of lesser number of Rs 2000 notes
• Capacity reduction in ATMs due to placement of smaller denominations
• Hoarding of cash by the public due to the festivals ahead
• Return of cash transactions after remonetisation with an increased average ticket size of ATM withdrawals as compared to the pre-demonetisation days.
• Mismatch between “growth of currency in circulation and growth in economic activity”

How does the RBI decide on how much cash is required?

• At the start of every calendar year (before the beginning of the financial year), RBI holds a meeting to calculate the country’s annual cash requirement.
• It works on an econometric model that accounts for variables like the quantum and value of notes - that are in circulation, that are destroyed and those that need replacement.
• This is done with an eye on the projected GDP growth and inflation in the coming fiscal and the expected volume of e-transactions (fund transfers, card and e-wallet payments etc...). 
• RBI collects data from its 19 regional offices, and then decides on how much currency to allocate to each office — remittances are generally made quarterly.
• ‘Coins and Currency Division’ of the Finance Ministry, that oversees the exercise is then intimated of the quantum to be printed in each denomination.
• The information on the amount of currency to be printed is a closely guarded secret between the RBI and the Finance Ministry.
• Based on the estimate of currency needed, an indent or order is placed with the country’s four currency note printing presses.  

Is the current crunch different from the one during demonitisation?

• During demonetisation, there was a cash crunch - not just at ATMs but also in bank branches as 86% of the currency was sucked out of the system.
• Some experts opine that “different states have seen cash crunches at different times, and this is not in itself a new phenomenon”.
• Also, first half of April is said to always experience a demand spike for cash, as it is the beginning of the new financial year. 
• Additionally, the possibility of government stopping the printing of new Rs 2000 notes could’ve increased the quantum of hoardings. 
• High-denomination notes as percentage of the cash in circulation has perhaps settled at a higher level than it was pre-demonetisation.
• While there is indeed an attempt to reduce or re-normalise this, the current shortage at ATMs looks like a distribution issue rather than supply shortage.  

Source: Indian Express