Explainer: What caused the cash crunch in Andhra Pradesh, and what is being done

Till Wednesday, 23% of the 8,075 ATMs of major banks in Andhra Pradesh were completely dry.
Explainer: What caused the cash crunch in Andhra Pradesh, and what is being done
Explainer: What caused the cash crunch in Andhra Pradesh, and what is being done
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When N T Rama Rao imposed prohibition in united Andhra Pradesh in 1994, those who desperately needed a drink would cross the Karnataka border to visit Bidar or Gulbarga to frequent the watering holes.

The joke doing the rounds now is that with ATMs in Telangana and Andhra going dry, people would need to cross the line again. This time, not to get drunk but to stock up on cash.

Till Wednesday, 23% of the 8,075 ATMs of major banks in Andhra Pradesh were completely dry. Not that the remaining cash dispensers were up and running all the time. They too were putting up the `No cash' board intermittently or giving out reduced amounts of cash. The situation improved to an extent in Vijayawada on Thursday which received 300 crore, resulting in 90% of its ATMs running. 

The Andhra Pradesh government blames a RBI decision taken in May 2017 for the mess.

C Kutumba Rao, Vice Chairman of the Andhra Planning Board says, “At that time, reacting to incidents of new currency in large quantities going into the hands of alleged scamsters, the RBI had stopped the movement of cash surplus in one state to another which may be in need of cash. Which meant even if Hyderabad had little cash, it could not borrow from a Bengaluru. Though Andhra has taken cash from a currency chest in Karnataka in the past in early 2017, we could not do it this time.''

According to the RBI website, Andhra has 206 currency chests, Telangana has 156, Karnataka has 267 while Tamil Nadu has 275. 

The Andhra State Level Bankers Committee says this Monday, following the uproar over cash crunch, the RBI decision was revoked. That helped Andhra reach out to Tamil Nadu to get Rs 400 crore from a currency chest in Coimbatore. 

Another reason for the cash crunch was the manner in which fears surrounding the Financial Resolution and Deposit Insurance Bill (FRDI) were not adequately addressed. The message started percolating down that the Bill will allow failing banks to use depositors money to cut losses and save themselves from bankruptcy. 

This resulted in the number of withdrawals from banks increasing post-November 2017. There was a mismatch and for every rupee deposited with a bank, Rs 1.25 was withdrawn. Hoarding of cash began and this was reflected in the income velocity which is the rate at which money exchanges hands.

According to the SBI's economic research department, income velocity went down from 0.93 in October 2017 to 0.84 in March 2018. One of the reasons for this is that currency of higher denomination, which is mainly the 2,000 rupee note, was not getting adequately circulated in the economy. 

The Punjab National Bank scam was like the final nail in the coffin. The trust in public sector banks started dwindling, with mid-size deposits getting withdrawn. Banks reported customers breaking their fixed deposits of Rs 50,000 to a lakh or closing accounts permanently. This meant banks were forced to canvas for deposits in February-March to meet their annual targets.

Interestingly, at around the same time, the real estate market across the country has shown a spike which means much of this money was being shifted to land. The Telangana stamps and registrations department that would earn a revenue of Rs 300 crore every month on an average through property registrations, saw the figure jumping to Rs 450 crore in the first quarter of 2018. 

Sometime in 2017, the RBI also stopped printing 2,000 rupee notes and focused more on 200 rupee notes. But most of the ATMs were not calibrated to fit the 200 rupee notes which meant the notes that were available could not be dispensed through ATMs, bringing back the memories of the days post-demonetisation. 

Despite much of this information being flagged with the Finance Ministry, nothing was done. On February 14, AP Chief Minister Chandrababu Naidu sent an SOS to Arun Jaitley asking for Rs 5,000 crore in different denominations to be sent to Andhra Pradesh.

The CM pointed out that employee salaries came to Rs 2,500 crore while 45 lakh social welfare pensioners had to be given Rs 450 crore. He also mentioned that farmers are unable to withdraw the money that has been paid to them for procurement of food grains as majority of banks were running out of cash. 

The missive failed to have the desired effect. In the last two months since the letter, the Andhra Pradesh government claims it has received only Rs 1,250 crore from the RBI. 

The challenge for the Naidu government now is to save on cash. On March 1, 2018, Andhra Pradesh had Rs 1,780 crore in its banks. The amount did not last more than five days with people withdrawing more than what they required. 

The plan now is to persuade people not to hoard cash by making ATMs up and running. Andhra's bankers committee has instructed banks to replenish their ATMs regularly with whatever cash is available to reduce the sense of panic in the public. But the real challenge may come towards the end of the month when everyone will queue up to withdraw their salary amounts. 

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