note demonetisation

Demonetisation effect: Bank withdrawals far outstrip deposits in one Andhra Pradesh district

The result: a severe liquidity crisis. Though people are entitled to Rs 24,000 a week, banks here are handing out much less.

Last Thursday, 900 customers lined up to withdraw money from the Andhra Bank branch near Kuppam in Andhra Pradesh’s Chittoor district. Only three people came to deposit money.

This was not an aberration – the same pattern can be seen in banks across the district.

“This month, we paid out Rs one crore to customers,” said a manager at a small branch of the State Bank of Mysore in Chittoor. “Barring old notes, we have got only Rs one lakh from customers, and that too for RTGS”, or real-time gross settlements, a form of instant fund transfer.

Deposits at Indian Bank in Kuppam have dropped from Rs 40 lakh each day to just Rs 15 lakh. This branch is a “currency chest”, one from which the Reserve Bank of India maintains a local store of money to dispense to other banks in the area.

A month after the government delegitimised 86% of the currency circulating in the economy, the liquidity crisis in banks in Chittoor continues to be severe. With few point of sale machines through which people can conduct transactions by credit or debit card, most are desperate to make withdrawals for their expenses. But the supply of new currency from the RBI continues to be limited. Banks have been forced to ration money otherwise it would get over in a matter of hours.

This, in turn, has made people averse to depositing money in banks – they aren’t confident they will be able to withdraw it when they need it.

“People are stocking cash at homes and not rotating it,” said the manager of State Bank of Mysore. “Businessmen in particular are not giving banks their earnings because their entire business depends on cash.”

This is further reducing the ability of banks to disburse cash, tightening an already acute liquidity crisis.

Withdrawal cap meaningless

For ordinary people, the liquidity crisis is resulting in long waits and losses.

One afternoon last week, a large crowd of women sat waiting in the shade of a tree outside the small branch of the Andhra Bank at Dravidian University near Kuppam. Money had not yet arrived and withdrawals were yet to begin.

In the crowd was Shanthamma, a middle-aged woman who worked on other people’s land for daily wages. Two weeks ago, she had deposited gold at Andhra Bank as the surety for a loan of Rs 78,000 for her children’s education. Since then, she has spent every single day in a queue outside the bank. Each day, she is able to withdraw Rs 2,000 from her account and each day she returns.

“A bank official in Kuppam told me that I would be able to withdraw Rs 24,000 each week so I would be able to get the entire loan amount in a month,” she said. “Instead I am standing here waiting for Rs 2,000.”

The official cap on cash withdrawals placed by RBI is Rs 24,000 per account per week. But with the RBI still scrambling to print new notes and customers continuing to rush to withdraw money, banks are not able to distribute even the government-sanctioned limit.

The bank manager G Subramanian expressed helplessness. “We do not have a sufficient cash supply with us,” he said. “We are able to give people only Rs 5,000 each. Day by day, customers are increasing, but the only transactions we are making are withdrawals and transfers. There are almost no deposits.”

For Shanthamma, this is a nightmare. At the rate of Rs 2,000 a day, she will lose 39 working days, or almost two months to access the loan, for which interest charges will already have begun.

United in shortage

The State Bank of Mysore in Chittoor caters largely to salaried employees in Chittoor town.“The RBI says each person is entitled to Rs 24,000 per person. Today, we are giving only Rs 4,000 to each person,”said a bank official. “Even currency chest banks are not getting money from the RBI.”

One of three currency chests in Chittoor town is Indian Bank, where notes from the RBI have been coming in sporadically. This makes it difficult for banks to plan ahead for disbursing cash to customers. For instance, the bank received Rs 62.5 crore on November 29, Rs 100 crore on December 2 and then Rs 60 crore on December 5. The bank is yet to receive a single Rs 500 note.

“People are not taking money to the markets because they know they will not get change,” said an official at that bank. “Having Rs 500 notes would solve 50% of the problem immediately. Until then, economic activity will be at a standstill.”

If currency chests are facing shortages, banks further down the chain of supply are even worse off.

“We are facing huge difficulties with currency,” said K Sahadeva Naik, a senior manager of a Grameen Bank in Kuppam, a town in Chittoor district. “The government is telling us to give [old age] pensions of Rs 1,000, but it is giving us Rs 2,000 notes. And even the supply of Rs 2,000 notes is not up to the mark.”

Naik said that the bank has managed to disburse only around a quarter of the Rs 500 crores worth of old notes that its customers have deposited since November 8.

“We are giving people money according to their needs,” Naik said. “If someone needs to go to the hospital or has a marriage, we give them Rs 24,000. Else we ration cash based on our morning stocks.”

Loans on hold

The shortage of cash has led to other consequences, not least of which is the inability to disburse loans. In that, Shanthamma is not alone.

The Chittoor District Central Cooperative Bank has sanctioned around 1,500 loan applications worth around Rs 10 crore in October and November. With withdrawal limits on all accounts, the bank has been unable to distribute the loans.

“If one person has been sanctioned a loan of Rs 1 lakh, it will take him three weeks to access this, although interest is charged from day one,” said E Manohar Gowd, deputy general manager at the bank. “If he has cash with him at home, there is no problem, he will manage. But if he has no cash, then how? We have the funds to pay them, but not the liquidity.”

Even loan repayments have been stalled at the cooperative bank, with the RBI having forbidden them from accepting old notes.

“People want to repay loans in old notes, but we are now unable to accept them,” Goud said. “This has led to a further loss of liquidity.”

The Andhra Bank where Shanthamma waited was to get Rs 30 lakh in cash from its holding branch in Palamner that afternoon. A few minutes into this reporter’s conversation with Shanthamma at the Andhra Bank, an SUV pulled up outside. In its boot were two heavy iron chests.

“The money has come!” someone shouted and the crowd immediately scrambled to the bank’s doors.

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