Cash Crunch: We are witnessing a crisis of confidence in banking system

ATMs in various parts of the country are running dry; the situation is particularly hard in Telangana and Andhra Pradesh, which border Karnataka, the land of big bucks elections. The immediate suggestion is that cash is being sucked off to be used by the big parties, competing to give the people good governance.

Elections, a mild economic revival after a severe self-inflicted economic injury of demonetisation, an impending nationwide general election, and with good people like the Bellary brothers back in the electoral fray clearly means black is back in a big way. It never really went away, but property transactions and political and bureaucratic corruption that are “cash intensive” affairs somewhat slowed down. Now the property market is picking up and cash is king again. The political scene is hotting up and once again cash will choose kings too.

Currency in circulation now is almost at pre-Namonetisation levels—at 99.17%. It has taken 15 months for the currency in circulation to get back to the levels of November 8, 2016. On 28 October 2016, the total banknotes in circulation in India were valued at ₹17.97 lakh crore. In its annual report of March 2016, the Reserve Bank of India stated that total bank notes in circulation were valued at ₹16.42 lakh crore, of which nearly 86% were sucked out of the market overnight on November 8, 2016. Around ₹14.18 lakh crore at the time derived from ₹500 and ₹1,000 banknotes. The total currency in circulation now is at ₹17.82 lakh crores as of February 23, according to the latest RBI data. The note ban to tackle corruption, black money and terror funding among others reduced the currency levels to ₹8.93 lakh crore on December 30, 2016, the last day to surrender the banned currency notes.

All these three are back as before, as also the cash.

So there is now a renewed demand for cash. Cash to buy property, cash to buy gold, cash to pay off bureaucrats, cash to fight elections, cash for things like signature suits and Chopard eye glasses, and cash to send abroad by hawala. In short, black is back with a bang! People are now using up cash stashed away in banks.

For some weeks now, people have been asking me as to whether the banks will be able to weather the gigantic NPA's of the Ambanis and Dhoots, bank frauds by the likes of Mehulbhai and Niravbhai, and the closed circuit misdemeanours by the likes of the Kochhars. Every bank depositor realises that these monies not coming back to the banks is from their money, and they are worried.

I went to the bank the day before to attend to some pending business. My driver also came in and withdrew cash. As we were going in, I casually asked him how much he was withdrawing. His answer left me flummoxed. He said “everything”. I asked why and he replied that his neighbours were talking about the impending cash drought. I told him not to be silly, but he went ahead. Since I was with the manager, I wrote out a check for ₹25,000 and asked for it to be cashed. Immediately the lady queried whether I was doing so based on "some inside news". The following day, the ATMs ran dry.

This reminds me about what Professor Paul Samuelson (then at MIT), the Nobel Laureate and the man who wrote the universally standard textbook on Economics, told me in reply to a question. I, a bit cheekily, asked him if he and the other vaunted economists ensconced in Harvard's William James Hall, anticipated the closure of the banks on March 3, 1933, Samuelson replied that he hadn't anticipated it, nor did any of the great professors. They just deposited their weekly cheques and went home for the weekend. On Monday, the banks downed their shutters and only the janitor at William James Hall had cash, which he was lending to the professors. The janitor told Samuelson that "something didn't look quite right" and so he withdrew all his cash on the Friday before.

To common people whose money is literally hard-earned, the value of what little they may have rises exponentially, and they tend to be more risk averse. Even as the depositors were worried about their cash, the government began bandying about its first major banking "reform", the Financial Resolution and Deposit Insurance (FRDI) Bill which implied that in a crisis due to NPAs, the banks could dip into depositors cash to shore up their capital. This is commonplace in the world, but in India it acquires a very different meaning, as the Government mostly owns the banks. In simple terms, to most people it just means that the money others have taken away would have to be paid by them. The crisis in confidence is now palpable, and it seems the aam aadmi is not taking chances. The mango people who made good with more easily earned money tend to be much less risk averse. Besides, where would they put all their cash?

Once again, the Finance Ministry messed up. The ATMs are configured to function best with new currency notes and clearly the presses are not able to meet the demand. The security printing presses are old and decrepit and plagued with low productivity. The Security Printing & Minting Corporation of India Ltd (SPMCIL) is a Mini-Ratna Central Public Sector Enterprise. It has to be, for how can you be unprofitable when your business is printing cash? SPMCIL is engaged in the manufacture/ production of currency and bank notes, security paper, non-judicial stamp papers, postal stamps and stationery, travel documents such as passports and visas, etc, and works under the direct administrative control of the Ministry of Finance and the Department of Economic Affairs.

What we have now is a crisis in confidence in the nation’s banking system. The government needs to act to restore public confidence shattered by the shenanigans within the banks and the asininity of policy. I recall the run on the Unit Trust of India in 1998. The then Prime Minister was travelling abroad. The Finance Minister was in Washington DC for the annual IMF/World Bank schmoozing session, accompanied by the Finance Secretary. I was left behind in Delhi at the last moment because Brajesh Mishra, then Principal Secretary to the PM, scratched my name out. By default, I was the senior man on hand. The run seemed induced. The big guns were all away and Brajesh Mishra was typically clueless about such things.

No sooner did the FM reach Washington than he called me and asked me to rush to Bombay to the UTI to wave the flag and to show that he was on top of the situation. He spoke to the RBI Governor, who then called me at UTI to tell the then Chairman, PS Subramaniam, that the RBI will make available however much cash he needed to restore the confidence of unit holders. The UTI then pitched a shamiana with banners offering to redeem every unit presented. It was a novel way of doing things and the media gave it very wide coverage. By the next day, the run abated and soon things went back to normal. Sadly in UTI's case it just meant more investment to shore up markets and crony capitalist investment.

Finally, this I must say this. Even Yashwant Sinha was a darn sight better Finance Minister than Arun Jaitley.