Lessons from cash crunch

The large network of digital payment infrastructure developed in the last over five years must be fully harnessed

By Author Dr K Srinivasa Rao   |   Published: 9th May 2018   12:06 am Updated: 8th May 2018   8:31 pm

Though replenishment of cash and renewed confidence of public will soon resolve the cash crunch issue, its resurgence cannot be ruled out unless compatible long-term cash in circulation (CIC) policies are firmed up. It requires a granular drill down to introspect reasons for such disequilibrium in cash management. Cash is important to keep the economy on track. Any interruption in cash-intensive economic activities at the bottom of the pyramid will soon bloat to eventually usurp prospects of growth.

In the digital age, communication flows through social media. Influenced by such rapid information flow, even people not in need of cash may queue up to store it to overcome any possible future cash crunch, thus unknowingly adding to the woes. Many such unwanted cash withdrawals could sum up to put pressure on local cash stocks. Thus social media sometimes can potentially escalate public anxiety.

Therefore, intelligentsia may use social media more to disseminate financial literacy and help resolve social issues. With data costs coming down, penetration of social network is increasing fast with its attendant risk.

Volume of Cash

Though there is a contention that CIC is not in tune with the growth in nominal GDP, it is

debatable. The CIC at Rs 17.5 lakh crore on November 8, 2016, went up to Rs 18.43 lakh crore on April 6, 2018. Of this, the public holds Rs 6.7 lakh crore worth of Rs 2,000 denomination. It is also perceived that the entire stock of currency notes of Rs 2,000 is not actively in circulation causing a shortage of cash in value terms.

Moreover, the RBI going slow on printing Rs 2,000 notes to focus more on smaller denominations of Rs 200 in preference for larger ones might have impacted the supply position.

Calibration of ATM bins can ease cash supply. Thus, baring a temporary mismatch in demand and supply, cash is available to meet genuine needs. The seasonal demand for cash is not a new phenomenon and banks are used to it. But the persuasion to move towards a less cash society – the stated objective — must be achieved with continued digital thrust.

Strengthening ATM Network

The incremental rise in the number of ATMs had gradually come down from 18,580, 10,075 to negative 743 when data of February 2015 to 2018 is compared. Even among those ATMs, many are either not loaded with cash or are not functional. It is estimated that 40% was out of service, which has now come down to 15%. Non-maintenance of ATMs adds to the inconvenience. It is essential to restore its efficiency for seamless cash availability.

Some of the banks have closed down ATMs due to lack of hits and some on safety consideration. Such lack of usage needs to be relooked keeping in view 855 million debit cards and 33 million credit cards in use. Fixing responsibility for non-functioning ATMs in the banks is to be institutionalised.

Moreover, the synergy of three million point of sales (PoS) is yet to be fully derived. They need to be made fully functional and popularised in the hinterland. Even the number of ATMs at 2,07,000 does not compare well with international benchmark even when compared with the Brics nations.

According to World Bank data-2016, the number of ATMs per 1,00,000 population in India is 21.24 at the bottom of the pecking order with Brazil at 108.82, Russia – 168.70, China at 81.45 and South Africa — 69.29. The global average is at 47.55 while the US has 165.78 and the UK at 129.49. It may, therefore, be necessary to once again focus on the steady growth of ATMs in next 2-3 years if the efficiency of allocation of cash is to be improved.

Low Digital Inertia

The thrust on digital banking, more importantly, payment and settlement, is losing traction. Incentives and promotion of alternative delivery channels such as internet banking, mobile banking, use of e-kiosks, payments through Unified Payment Interface (UPI) and Bhim app need a further push.

Similarly, the use of digital wallets of banks and fintech companies are more or less confined to metro and urban areas. The newly-formed differentiated banks, government agencies and non-government organisations (NGOs) will have to work in rural areas to push digital payments by imparting digital literacy to shift from cash to digital mode. Ultimately, future rests with the digital payment network.

The renewed dominance of cash is also evident from fall and rise in cash to GDP ratio. It has gone down from 12.08% in FY16 to, 8.75% in FY17 but when cash supply got replenished, the ratio again went up to 10.92. Some of the comparable economies are managing with low cash to GDP ratio. Among the Brics nations, cash to GDP ratio in Brazil is 3%, Russia 9%, China 9.1% and South Africa is 2.5%. Hence, more efforts are needed to move towards a less cash society.

Keeping in view the experience of cash shortage and its ramifications on trade, users of social network forming part of the intelligentsia, need to disseminate awareness and knowledge on expanding digital space in financial intermediation. Cash crunch need not necessarily relates wholly to the volume of cash but is more about increasing its distributional efficiency.

The large network of digital payment infrastructure developed in the last over five years must be fully harnessed to bring about a cultural shift towards digital payments. The short-term solutions are with government agencies but a long-term cultural shift towards a less cash society rests with all stakeholders. Ultimate digital push can be a panacea to keep India on a sturdy map of low cash society that can meet the vision of a clean public life.

(The author is Director, National Institute of Banking Studies and Corporate Management, Noida)