Cash Crunch Due to Less Income Velocity, More Withdrawals: SBI

Mumbai, April 18 : Describing recent reports of cash shortage in the country as "logic defying", state-run State Bank of India (SBI) on Wednesday said the possible reasons could be the declining income velocity of currency with the public in 2017-18 coupled with increased ATM withdrawals during the second half of last fiscal.

An SBI Ecowrap report authored by Chief Economist Soumya Kanti Ghosh said that currency in circulation in the economy had reached Rs 18.29 lakh crore by March 2018, surpassing its pre-demonetisation level of Rs 17.98 lakh crore.

Blaming "unusual demand" for currency shortages in some areas, the government on Tuesday announced it has decided to increase printing of Rs 500 notes by five times.

"The recent reports of cash shortage appear intriguing and defy logic. However, there are a couple of trends that beg explanation and may be the possible reasons for such apparent trend," the SBI report said.

"First, income velocity (of currency with public) has been on a declining trend in FY18, particularly in the second half. This indicates possibly currency of the higher denomination Rs 2,000 is not getting adequately circulated in the economy.

"Our internal estimates suggest that in states like Bihar, Gujarat and the southern states, the income velocity is far less than the national average," Ghosh said.

Juxtaposing this trend with the ATM withdrawals, he said that during the second half 2017-18, ATM withdrawals increased by 12.2 per cent, as compared to the first half.

"This growth was much higher compared to FY16 or FY15 and even the 5-year average (8.2 per cent during FY12 to FY16)," the report said.

"We believe, there has been a forced shift in currency composition with more of smaller denomination notes in circulation now."

Ecowrap pointed out there was no Rs 200 denomination note during remonetisation in 2017.

"However in FY18, the pace of circulating Rs 200 denomination increased manifold, as has happened with with notes of smaller denomination.

"This may have altered the demand for smaller denomination notes in a larger way to possibly substitute (more transactions) for the currency of larger denominations which are getting less. As ATMs have to be replenished more frequently, it can lead to the conjecture that cash is not available," it said.

"Additionally, heightened economic activity beginning Q4 of FY18 has meant that the demand for working capital cycle has changed for the better resulting in more usage of cash for transactional purposes. This may have also prompted more withdrawals," it added.

Regarding the availability of cash with the country's largest lender, SBI Chief Operating Officer Neeraj Vyas said in a statement that the situation had improved over the last 24 hours.

"Efforts are being made on a continuous basis to improve the cash availability further in a few geographies. Overall issue of less cash should come to normalcy within soonest possible time," he said.

(The above story first appeared on LatestLY on Apr 18, 2018 06:34 PM IST. For more news and updates on politics, world, sports, entertainment and lifestyle, log on to our website latestly.com).