With India’s demonetization set to come to an end on Dec. 30, banks in the country are warning the government they will have a tough time handling the sudden rush for cash when the program is over.
According to a report in the FT.com, bankers in India are saying they won’t have enough cash for the demand expected once the freeze thaws, so to speak. “If the government lifts the limits on Friday and there is a sudden rush, banks will be totally dependent on the central bank to give them enough liquidity,” said Soumyajit Niyogi, associate director at India Ratings and Research, in the report. “The Reserve Bank of India has been giving assurances that it has enough cash, but reports of how much currency there currently is in the system suggest this might not be the case.”
The report cited RBI data that showed that as of Dec. 19, only 38 percent of the Rs15.3tn in demonetized notes that were taken out of circulation had been replaced. That low number is raising alarm bells with the banks. “The government and the RBI need to make sure there is enough cash in the system before they lift the withdrawal limits,” an unnamed executive said in the report. In November, Prime Minister Narendra Modi announced the country’s 500-rupee and 1,000-rupee banknotes were being taken out of circulation.
As reported by the BBC, taking those notes out of the financial system represented an effort to stymie fraud efforts, corruption and what the BBC noted as “illegal cash holdings.” Modi stated that the illegal activities are among the “biggest obstacles in eradicating poverty” — with a bead being drawn on tax evaders, according to the BBC. A new set of 500-rupee and 2,000-rupee notes are being issued as replacements. Banks have 50 days to comply with the new directive, with individuals able to exchange those notes beginning Nov. 10 and extending through Dec. 30.
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