1. Summary
  2. Influences of demonetization
  3. Demonetization move and Factor faced by banking sector


Demonetization may be a tool to battle Inflation, Black cash, Corruption, and Crime, discourage a money-dependent economy and facilitate trade. Its policy of the govt. by prohibition Rs. 500 and Rs.1000 currency notes have influenced most of the corners of the economy. Herewith analysing the impact of demonetization on the Banking Sector. The liquidity boost ensuing from the demonetization announcement on Nov eight, 2016 has stayed with the banking sector a year when the event, serving to banks scale back their high-cost deposits and boosting their accounting and bank account (CASA) magnitude relation.

Influences of demonetization

  • Increase in Deposits: Demonetization has magnified the deposits in Banks. Unaccounted cash within the kind of Rs.500 and Rs.1000 were flowing to the Banks and also the sizes of deposits are magnified. It helped the banks to grab the deposits and increase their deposits. The bulk of the deposits thus mobilized by SCBs are deployed in:
    • Reverse repos of varied tenors with the RBI; and
    • Cash management bills (CMBs) issued underneath the Market Stabilisation theme

Fall in price of Funds: Over the past few months, the deposits are magnified. It light-emitting diode the banks to stay a serious a part of deposits within the kind of money deposits. PSU Banks have a lion share (over 70%) of the deposits and largest gainers of the increase in deposits, resulting in a lower price of funds. Surplus liquidity conditions have helped facilitate the transmission of fiscal policy to promote interest rates. Post demonetization, many banks lowered their domestic term deposit rates and loan rates. The median term deposit rates of SCBs declined by thirty-eight rates throughout Nov 2016-February 2017, whereas the weighted average term deposit rate of banks declined by twenty-four rates (up to January 2017). Combined with the sharp increase in low price CASA deposits, the general price of borrowings declined, permitting banks to scale back their loaning rates.

  • Demand for presidency Bonds: when a sharp rise in deposits posts demonetization, banks started loaning such surplus deposits to the run underneath the reverse repo choices. PSU Banks, significantly, deployed excess funds in government bonds. The comeback on bond investment is probably going to feature a fifteen to twenty percent increase within the earnings of banks.
  • Sagginess in loaning: Lending growth of the banks is significantly less even when demonetization and its impact of growth within the quantity of public deposit. Banks have tried to lend the money to the destitute cluster by reducing their interest rates, however, it shrank over a previous couple of months.

Demonetization move and factor faced by the banking sector

  • Increase of deposits: The prohibited notes of Rs.500 and Rs.1000 accounted for eighty-six of the currency circulated within the market. This meant the people had to submit their cash and in exchange get the money bank. Because the people who had the money wherever such a big amount of, there was a rise within the deposits within the banks. There was a boost within the bank money liquidity magnitude relation and also the size of public deposits had considerably magnified.
  • Shortage of liquid cash: Liquid money implies the currency notes or coins within the hands of the customers. When the disapprobation, the folks of the country were squabbling over the shortage of money in their hands. Or maybe if that they had the money they were unable to use it because it had become criminal. Folks stood to go in lines over hours before banks and ATMs to induce their cash change. Indeed this light-emitting diode to widespread protests within the country.
  • Demand for presidency bonds: People progressively started financing in government securities and government bonds because the stock markets were in pretty unhealthy conditions and also the government bonds acted as safe havens for the investors. Several public sector banks used this chance to use the surplus profit their banks to use as government bonds. This can eventually lead to immense turnover for the banks. It’ll lead to a probable 20-25% increase within the earnings and revenue of the banks.
  • Decrease in interest rates: There was a surplus of money reserves at the banks. This meant that the rates set by the run, together with the CLR and CRR were fulfilled and extra cash was left. So several banks explicitly give out loans at a lower charge per unit. This move resulted in several personal and public sector banks considerably increasing their loans capacities. In fact, in step with one such study, it had nearly magnified by two hundredths.
  • Increase use of bank accounts: Demonetization although had a variety of pitfalls, however, it steadily magnified in folks having a checking account. This move was plus the initiatives by the govt. to have interaction in folks having a checking account. This light-emitting diode several poor families and people below the poverty level to open zero checking accounts, which might facilitate them being connected with government initiatives and providing an avenue for storage of cash.

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BankReed Admin

Banking Professional with 16 Years of Experience. The idea to start this Blogging Site is to Create Awareness about the Banking and Financial Services.

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