Although there has been an increase in the use of digital payment systems for settlement of various transactions, paper currency continues to be the most favoured means of settlement of daily transactions, especially among common people. For currency notes for daily transactions, the public largely depend upon ATMs.
Several ATMs in metros are now filled with higher denomination currency notes of Rs 2,000 and Rs 500 and cardholders rarely get lower denomination notes (Rs 100). It is strange to see that on ATM machines kept in a shop/lobby, stickers are affixed indicating availability of only Rs 500 notes or only Rs 2,000 notes.
When ATMs have only Rs 2,000 denomination notes, the common man cannot withdraw any amount less than Rs 2,000 and, worse, finds it difficult to use these notes for low-value transactions. Banks do save recurring costs involved in cash replenishment when they fill ATMs with Rs 2,000 notes, rather than Rs 100 notes as the frequency of replenishment comes down by 20 times. But are banks not filling ATMs with Rs 100 notes to reduce the cash replenishment costs or because of non-availability of adequate quantities of these notes?
The cash shortage experienced during the demonetisation period is now history and currency notes in circulation amount to over Rs 19 lakh crore (RBI Bulletin, September 2018). The RBI, in its Annual Report released on August 29, admitted that Currency-to-GDP ratio has moved up to 10.9% in 2017-18, being amongst the highest levels of currency usage in peer emerging market economies and advanced economies. However, the ratio is still lower than what it was during the last decade, except during the demonetisation year (2016-17, when the ratio came down to 8.8%).
However, the composition of currency in circulation reveals certain trends – the higher proportion of high-value denominations (Rs 500 and Rs 2,000) in terms of value or, in other words, the declining share of small value notes, or notes up to Rs 200 denomination.
The value of currency in circulation increased by 37.7% on year-on-year basis to more than Rs 18 lakh crore (March 2018) whereas the volume growth is only 2.1% (to 1,02,395 million pieces). Consequently, the share of high denomination notes increased to 80.2% from 72.7% (FY16-17). In volume terms, the share of small denomination notes has fallen sharply to 82% from 91% and in value terms to 19% from 27%.
Even the value of the most popular small value notes (Rs 100) in circulation has come down to Rs 2.22 lakh crore from Rs 2.53 lakh crore and the total value of all small denomination notes, even with introduction of the Rs 200 notes, is more or less stagnant at Rs 3.5 lakh crore.
It is well understood that in terms of value, the cost of printing/storage/distribution of notes per rupee is much lower for high denomination notes. Despite the steep increase in value of currency notes in circulation on year-on-year basis, the RBI could reduce the cost of printing of notes from Rs 7,965 crore (FY 16-17) to Rs 4,912 crore (FY 17-18), although one reason for the higher cost in FY16-17 was the heavy cost of replenishment of currency notes post-demonetisation).
The decrease in expenditure was mainly on account of reduced supply of notes during the year 2017-18 at 25,003 million pieces, 14% lower than that of the previous year’s supply. However, the expenditure for printing of notes in earlier years was much less than the expenditure incurred during FY17-18. Therefore, the strategy appears to be to reduce incremental volume and at the same time increase the value by focusing on high-value currency notes.
All this data leads to one conclusion: the increase in value of bank notes in circulation is mainly through high denomination notes. Needless to say, the common man uses more small denomination notes, especially the Rs 100 denomination. Moreover, many ATMs are not calibrated for the recently introduced Rs 200 notes. And, excessive supply of higher denomination notes and non-availability of adequate volume of Rs 100 notes, coupled with savings in cost of cash replenishment of ATMs, encourages banks to fill ATMs with Rs 2,000 and Rs 500 denominations.
The quantity of notes required to be printed is decided by the RBI using econometric analysis based on various factors, such as GDP growth prospects, inflation, disposal of denomination-wise soiled notes, etc. The RBI being the sole authority to issue currency notes, it is obligatory on its part to ensure adequate and timely supply of clean notes of different denominations in the system. It is time to print and distribute more Rs 100 notes so that banks need not be compelled to fill ATMs with higher denomination notes.
The RBI should also direct or incentivise banks to replenish ATMs with Rs 100 notes or, at least, 20-25% of the value of notes replenished must be in Rs 100 denomination to reduce the problems faced by the common man.
(The writer teaches banking at ICICI Manipal Academy, Bengaluru)
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