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Why the sudden cash crunch? Blame hoarding of Rs 2,000 notes, RBI's digital push, FRDI Bill

The association also claimed people across the country are fearful over the proposed the FRDI (Financial Resolution and Deposit Insurance) bill, 2017, which proposes to create a framework for overseeing financial institutions like banks. It said people are hoarding money, especially Rs 2000 notes, instead of depositing it in banks.

twitter-logo BusinessToday.In   New Delhi     Last Updated: April 17, 2018  | 16:32 IST
Why the sudden cash crunch? Blame hoarding of Rs 2,000 notes, RBI's digital push, FRDI Bill

The Reserve Bank of India (RBI), after observing cash crunch in some states of the country, has formed an inter-state committee that will work towards transferring currency from the states with adequate cash to those with a shortage. Contrary to the central bank's claims that the problem is temporary, the All India Bank Officers' Confederation (AIBOC) has claimed there's been around 30-40 per cent cash crunch in the country, which, it said, has emerged due to the RBI's constant pressure towards digital economy.

The association also claimed people across the country are fearful over the proposed the FRDI (Financial Resolution and Deposit Insurance) Bill, 2017, which proposes to create a framework for overseeing financial institutions like banks. It said people are hoarding money, especially Rs 2000 notes, instead of depositing it in banks. The association added the RBI - to make India a cashless economy, a prime initiate of the Narendra Modi government - itself is holding back cash to push people towards using digital systems to make transactions.

Around 30-40 per cent cash scarcity has emerged as currency notes of Rs 2,000 and Rs 500 denomination have been out of circulation. A major reason behind the cash hoarding seems lack of clarity on possible changes in the banking system, which is why people are hoarding maximum cash in large currency notes, suggest experts.

Earlier Finance Minister Arun Jaitley said that he had reviewed the currency situation in the country. "Over all there is more than adequate currency in circulation and also available with the Banks.  The temporary shortage caused by 'sudden and unusual increase' in some areas is being tackled quickly," he said.

PEOPLE FEARFUL OF FRDI BILL

As per the provision of the FRDI bill, the resolution corporation can bail in a bankrupt financial institution. Through the bail-out option, government can use public money deposited in banks to revive economy, while the bail-in option authorizes the centre to take out the public money to revive a failing bank. This particular clause has been a bone of contention between several banks account holders and the government. At present, all deposits up to Rs 1 lakh are protected under the Deposit Insurance and Credit Guarantee Corporation Act that is sought to be repealed by this bill. The government is yet to take a final call on insurance amount in the latest bill.

JAITLEY ON 'BAIL-IN' CLAUSE

Finance Minister Arun Jaitley had on 21 December 2017 tried to alleviate fears by assuring the Lok Sabha that all depositors' money in public sector banks will be protected and there is no need to create any fear psychosis. Many people say the FRDI Bill, which was introduced in the Lok Sabha in August 2017, could harm depositors' money due to the bail-in clause. "What do we do with that clause (bail-in). The committee has wise people which will make some recommendations. We will consider that. We are open-minded. We are very clear and the level of protection the government would want would be much higher than level which existed till today," he had said.

WHAT IS FRDI BILL

The FRDI Bill proposes to create a framework for overseeing financial institutions such as banks, insurance companies, non-banking financial services (NBFC) companies and stock exchanges in case of insolvency. The Resolution Corporation, proposed in the draft bill, would look after the process and prevent the banks from going bankrupt. It would do this by "writing down of the liabilities", a phrase some have interpreted as a "bail in". The draft bill empowers the Resolution Corporation to cancel the liability of a failing bank or convert the nature of the liability. It does not specify deposit insurance amount.

Also read: Demonetisation blues! 5 reasons why cash crunch has made a comeback
 

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