SBI chief counters RBI governor’s theory on sharp increase in cash with the public
The Governor attributed it to elections. The SBI Chief points out that past data doesn’t say so
In what may be perhaps for the first time, the Chairman of State Bank of India (SBI) has trashed the Reserve Bank of India (RBI) governor Dr Raghuram Rajan’s theory on increase in currency with the public. The governor has attributed the current surge in currency to elections. The SBI Chairman, Arundhati Bhattarcharya, has openly trashed this theory.
In a report in Times of India
, the SBI Chairman was quoted as saying, "We have seen even bigger elections in earlier years but the increase in currency with the public has not been that high. This time it is hurting our deposit growth." She told the newspaper that the reason for the cash surge was still a mystery. Some have attributed it to the jewellers' strike, which is preventing cash deposits. However, the strike was recent and the increase in cash has been seen for some time, she added.
The same report quoted the RBI governor as saying, "We see some possibility that around election time, cash with public increases. You can guess the reason why. We can also guess."
Ajit Ranade, an economist, in his column in Mumbai Mirror
, also expressed surprise at the increase in currency in circulation. As per the RBI data, over the past 12 months, the total currency in circulation increased by Rs2 lakh crore or by 15.2% to Rs16.6 lakh crore.
"Why is it so high? With the proliferation of digital wallets like PayTM and electronic payments, aren't we supposed to be moving to less cash usage, and toward a cashless society? If GDP growth is only about 7.4%, then why did cash in circulation grow by 15.2%? (It grew by only 10.7% in the previous year)," Mr Ranade wrote in his column.
SBI in its Ecowrap research report, has stated that election may be a small reason, but the bigger reason could be the trend in demonetisation. "There are suggestions in public domain and even analysis that are suggesting that higher denomination notes may be replaced. We believe, as a result of that people may be using more of high value currency to purchase safe haven assets. This apart, there has been an increased overdraft of nearly Rs170 crore that has been provided by the banks to the Pradhan Mantri Jan-Dhan Yojana (PMJDY) account holders which may also be responsible for this sudden spurt in currency," it says.
According to the report, there is an incremental increase in currency with the public. During the last fiscal (till 18 March 2016), it witnessed a jump of 48% over incremental increase in FY2015. It says, "The common perception is that FY17 being an election year people are hoarding cash. However, had this been true, even FY14 should have shown the similar trend. In fact, that year witnessed a decline."
"In fact, in FY12, when Punjab and Uttar Pradesh went to polls, currency in circulation actually witnessed a significant decline. Are we to believe that elections in Punjab and Uttar Pradesh are relatively more transparent than say other states like Bihar (reason for possible increase in currency in 2015)? It is hard to believe so. With state elections happening in almost all fiscals, the elections can’t thus be blamed all the time for increase in public currency holding," SBI Ecowrap says.
There has been suggestion that is doing the rounds that higher denomination notes of Rs1,000 and Rs500 be demonetized. This is expected to yield the following benefits:
Demonetizing Rs500 and Rs1,000 currency notes will bring a huge amount of the funds kept in these denominations into the banking channels and will facilitate a reduction in domestic black money transactions.
As holding cash in small denominations is cumbersome, the informal services payments made in day to day life, people will shift towards electronic modes of payment thereby making it increasingly easier to track financial transactions, thereby leading to better service tax and income tax collections.
However, SBI Ecowrap says there are logistical challenges for this. It says...
First of all - demand for banknotes and coins increased in FY15, notwithstanding the use of technology driven non-cash modes of payment.
Notes of denominations of Rs500 and Rs1,000 together accounted for about 85% of the total value of banknotes in circulation at end March 2015 while together they accounted for 22% of the volume at end March 2015.
Despite the presence of high denominations, RBI had spent Rs37.62 billion in printing notes in 2014-15. If the notes of these two denominations are withdrawn, the cost of printing notes for RBI would also multiply.
At the branch level, the cost of handling cash would zoom and there would be complete chaos as the funds kept in these denominations will be flushed into the banking channels. With higher amount of notes in circulation, the soiled/ mutilated notes will also increase. In India, the smaller notes have a life of less than a year. An Rs100 bill stays around for about three-four years. The Rs500 and Rs1,000 notes keep going for about five to seven years. Currently there are around 5,000 currency chests across the country with the Banks that are used for storing notes. The capacity of these chests would need to be expanded five times to enable storing of enough supply of currency to the public. Construction of these chests, which have specialized steel walls and doors, would take time, as well as, substantial investment.
Operators of automated teller machines say that demonetizing Rs500 and Rs1,000 notes will throw up huge challenges as ATM machines will hold lesser amounts than their current capacity. An ATM machine typically holds 10,000 bills and if these were to comprise only notes of Rs100 the rate of replenishment would go up. This will increase costs and inconvenience to customers. Besides, transaction time at machines would also rise because maximum amount that can be withdrawn at one go would be Rs4,000 since machines are designed to dispense only 40 notes at a time.
Along the entire supply chain for supply of cash, banking system will bear the highest cost primarily because of high fixed costs of ATM machines, counting, recounting, recycling, transport and storage of larger volumes of cash.
The news of the demonetization of currencies of denomination 500 and 1000 has been doing the rounds for a while, and this may be a plausible reason for increase in currency with public. The rationale for this is that people are taking out cash and buying other assets such as gold so that when the currency is demonetized they do not face a problem.
"Our considered view, therefore, would be that should demonetisation be seriously contemplated, a road map needs to be created. It needs to be done in steps and be balanced with creation of necessary electronic and digital infrastructure in the country coupled with creating awareness and financial literacy for ensuring that the man on the street is not put to undue hardship," the report from SBI Ecowrap concluded.