Outside the urban limits of Kurnool in Andhra Pradesh, a 90-km stretch in the direction of Yemmiganuar town boasts of nine ATMs and five bank branches. At the end of May, six months after demonetisation, of these nine ATMs, only one was dispensing cash. Most were closed. In Yemmiganuar, famous for its handloom industry, only five of the 11 ATMs were dispensing cash. Some of the ATMs have even downed their shutters indicating that they are unlikely to open soon.

Seven months after the demonetisation of Rs 500 and Rs 1,000 currency notes in November, hundreds of ATMs across the country are still not being supplied with cash regularly. RBI figures indicate that as on May 26, the currency in circulation was around Rs 14.66 lakh crores against Rs 17.11 lakh crores on May 27 last year. If the situation in areas within a radius of 100 km from Kurnool town is indicative of the larger trend, it’s clear that rural areas are bearing the brunt of demonetisation-induced cash shortages.

But that is not all. The shortage of cash in rural ATMs has compounded the problems faced by bank account holders while linking their accounts with their Aadhaar numbers – a requirement under Know Your Customer compliance norms. This is jeopardising the gains accrued by way of the expansion of the formal banking sector into rural areas over the past few years. Essentially, rural banking seems to be in the midst of a creeping crisis.

(Photo credit: S Ananth).

Banking in rural India

In recent years, the establishment of three different banking channels in rural areas – bank branches, ATMs and business correspondent authorised to collect small ticket deposits and extend small credit on behalf of the banks – led to the rapid expansion of the reach of banking in these areas. This prompted a change in the banking habits of rural customers.

This saw the large-scale opening of bank accounts, often referred to as zero-balance accounts, which do not require any minimum amount in the account to be operational. In addition to opening accounts, a large number of rural inhabitants, who had never entered a bank branch previously, also started undertaking banking transactions, like depositing small amounts of cash, withdrawing various government benefits and making money transfers.

Over the years, besides getting habituated to withdrawing money from ATMs, customers started exhibiting a distinct preference for visiting business correspondent outlets for banking-related work instead of making a trip to the branch. This is because bank branches are not always located close to each village, and visiting them is time-consuming and entails incurring travel and opportunity costs. The business correspondent outlets were established in villages initially as part of the RBI’s Financial Inclusion Plan and subsequently as part of the Union government’s Pradhan Mantri Jan Dhan Yojana.

However, post-demonetisation, non-functional ATMs mean that customers cannot access the money in their accounts easily or, in some cases, not at all. The ability of business correspondent outlets to dispense cash has been severely curtailed too, with their daily transaction limits halved in most cases. The old limits have still not been restored.

Business correspondents also aver that technical issues plaguing their technology platforms have increased in the past few months with even branch-level bankers often expressing exasperation at the state of things. The net result is that often business correspondent outlets become non-functional at a time when they are needed the most: either on the day of the weekly village fair or when wages for work done under the National Rural Employment Guarantee Act have been deposited into accounts.

Thus, post demonetisation, the only option left for rural customers is to visit the branch to withdraw money. An unsavoury result of this poor state of rural banking is that touts, who facilitate faster delivery of banking services, have returned.

(Photo credit: S Ananth).

Aadhaar linking problems

The unavailability of cash is afflicting all customers but it is still only one of the problems they face. An increasing number of customers who opened bank accounts face problems linking them to their Aadhaar numbers. The cited reason for this is compliance related to Know Your Customer norms. Bankers and business correspondents point out that the number of such cases is increasing as inactive customers are forced to use their bank accounts to access government transfers. The slippage in seeding, or linking, Aadhaar with their bank accounts means that customers are left high and dry. In one case, a customer had opened an account in 2010-’11 but did not use it, so the bank closed it. As the customer had submitted the account number for various government programmes, the money deposited by the government was returned.

Two successful business correspondents with a commendable track record of expanding banking services in underbanked areas pointed out that every week they grapple with approximately 50 such cases each. Redressal at the branch is extremely slow. The alternative for the customer is a circuitous route that involves opening another bank account, and running from pillar-to-post in each government office to change their bank account details in official records. This is a difficult alternative for customers with low levels of education.

Another customer at a business correspondent outlet complained that they had saved nearly Rs 8,000 in their bank account – mostly direct benefits transfer monies transferred to pay for a recurring deposit – but were unable to access it due to problems with Aadhaar seeding. This customer was unable to withdraw the money for the medical needs of their child even though the recurring deposit had matured.

Back to old habits

All these problems in rural banking are forcing customers to either spend an inordinate amount of time and money to visit the branch, or to withdraw from the formal banking system altogether. Being unable to withdraw their money when they need it the most – either due to non-working banking channels or problems with Know Your Customer compliance – have convinced them that the best place for their money is in their pocket, or hidden away at home. Business correspondents attest to this trend and point out that increasingly customers are not keen on depositing money in their zero balance accounts.

Unfortunately, for the rural economy and society, this cash crunch comes at a particularly inopportune time and coincides with the onset of the monsoon and the beginning of the academic year – both of which sharply increase the need for cash in households.

S Ananth is an independent researcher currently based in Vijayawada, Andhra Pradesh.