RBI hikes ATM withdrawal limit to Rs 10,000: 3 reasons why cash hoarding is likely to continue

A notification from the Reserve Bank of India (RBI), on Monday, increasing the daily cash withdrawal limit at ATMs from Rs 4,500 to Rs 10,000 per card, has brought cheers to customers.

This relaxation, coming nearly two and a half months post the Prime Minister Narendra Modi’s announcement to demonetise Rs 500, Rs 1,000 notes that resulted in an unprecedented cash crunch, is of course a relief to the common man.

Now, in one go, he/she can withdraw Rs 10,000 per card as against Rs 4,500, which is an amount good enough for an average citizen to take care of his short-term cash needs. But, this wouldn’t, however, address the actual problem---panic-driven hoarding of cash at a time when banks are still struggling to deal with inadequate currency supply.

There are mainly three reasons why the measure wouldn’t cure panic:

Representational image. Reuters

Representational image. Reuters

First, though things have improved, cash remains a scarce commodity even now in several places. It is a fact that many bank branches and ATMs aren’t able to honor even the current withdrawal limits promised to the customer. As former chairman of State Bank of India, Pratip Chaudhuri, told Firstpost in an exclusive interview on Monday, a sample check would reveal that one out of two ATMs, in many places, still doesn’t dispense cash.

Further, many ATMs still offer only the Rs 2,000 notes, which is hard to exchange. The point here is unless the supply of lower denomination notes substantially increases and majority of the ATMs turn operational, higher withdrawal limits would hardly help.

Secondly, announcing the relaxation on Monday, the RBI also said “There are no changes in the other conditions. The relaxations as provided in our circular dated November 28, 2016 will continue”. Here is where the next problem lies.

This means that the weekly withdrawal limit of Rs 24,000 stays. Hence, doubling the daily withdrawal limit do not mean much if you want to draw more cash. A person, who used to withdraw Rs 9,000 in two days per card earlier can do so in a single day now. But, he or she can’t withdraw more than Rs 24,000 a week. In reality, an average citizen doesn’t require this much cash, but the fear-driven tendency to withdraw more will come into play.

Third, the RBI notification is completely silent on the current cash situation and the future roadmap for lifting the cash withdrawal restrictions. It would have helped if the RBI could offer a solid roadmap on how it intends to lift the restrictions gradually. This wouldn’t be an impossible task given that the RBI should know (it is the guardian of currency) how much currency is printed in the four government mints and how long should it take to replenish the system with adequate cash. A firm guidance on future situation would have helped.

For these three reasons, the common man’s tendency to draw maximum permissible cash (even if he doesn’t need that much) and keep it at home anticipating future shortage would remain. When the cash doesn’t return into circulation, the shortage will persist. The psychological fear of continuing cash withdrawal limits would do more harm to the system. The RBI could have easily addressed this aspect by giving a guidance on till when the cash shortage will persist and what is the status of printing new currency. If RBI comes forward and be transparent on the cash situation, it can cure the panic among public to a great extent.

A big reason for the current unease in the cash economy is the shortage of lower denomination notes. The RBI flooded the system with Rs 2,000 notes soon after the demonetisation announcement, but this didn’t help much since it was difficult to transact in these denominations. The supply of Rs 500 notes have improved since then, but not to the desired extent. Things have relatively improved in metros and semi-urban centres but rural areas continue to feel the pinch.

According to Chaudhuri, there is a ‘general sense’ that private sector banks have been given more cash and since these banks have limited presence in the rural areas, enough cash isn’t reaching these centres. One doesn’t have information on the latest data on the new currency printed and, of which, how many are Rs 500 pieces since RBI has been hesitant to share the details. A Firstpost RTI query seeking these details has remained unanswered yet.

The bottom line is this: The central bank’s move to double the daily cash withdrawal limit is indeed a welcome step and a small relief, but to arrest the panic-driven cash hoarding it needs to lay out a plan in public and come with a firm guidance.

Published Date: Jan 17, 2017 11:02 AM | Updated Date: Jan 17, 2017 16:01 PM

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