Applied Finance Blog

Demonetisation 2016: A Big Transformation in Banking Sector

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Banking sector in India played an important role in economic growth and development. There was a big transformation in this sector after Government of India demonetized Rs 500 and Rs1000 currency notes in November, 2016 with the motive of bringing down black money, corruption and promoting cashless economy. It is reported that Rs15.4 lakh Crore constituting 86.9 per cent of the value of total currency notes in circulation were demonetised. The customers deposited and/or exchanged their banned currency notes, which in turn increased the cash deposits in banks. Further, usage of formal banking system, cash less transactions and digitalisation increased.

 

Demonitized 1000 Rs Currency Note

High Cash Deposits

Banks are the biggest beneficiary in demonetisation effect. Banks received higher deposits from their customers and Current Account Savings Account (CASA) increased effectively. CASA is the ratio which indicates how much of the total deposits with the bank in the current and savings account. As per RBI reports, excess deposits in the range of Rs2.8-4.3 lakh crore accrued to the banking system during the demonetisation period. The estimated cash deposits during November-December 2016 with 52 banks were Rs 4,35,800 crore. Cash deposits in these accounts during September-October 2016 were Rs 2,70,100 crore. Thus, a variation of Rs 1,65,700 crore can be assumed to be the increase in cash deposits under these accounts due to demonetisation1.

Formal banking

With the effect of Demonetisation, many people parked their money in the banks and therefore exercised active transaction which lead to transparency in their accounts. Under Pradhan Mantri Jan DhanYojana bank accounts (with minimum balance of zero linked with Aadhaar) for Crores of Indian citizens were opened so as to bring them into formal banking. Prior to this move, Banks added 46.65 lakh new accounts under the Pradhan Mantri Jan Dhan Yojna (PMJDY) during the five weeks after the demonetisation of Rs500 and Rs1,000 currency notes2. With this effect, Ministry of Labour and Employment has effectively opened around 3,840,863 bank accounts as on December 26, 2016, for workers especially in the unorganised sector, as part of its campaign to promote and ensure cashless transfer of wages to workers3.

Digital Mode

“Going cash less and Moving digital” is the mantra of demonetization effect in the year 2017. Banking sector limits ATM withdrawals by encouraging the customers to make card payments across the country. By adopting financial technology, banks are able to track money transaction of the customers through unique proof such as Aadhaar, PAN and Election card. The move towards a less cash economy increased digital mode of transactions.

Restriction on cash transaction: Finance Minister Mr Arun Jaitley has proposed various measures to accelerate India's transition to a cashless economy, including a ban on cash transactions over Rs 200,000, tax incentives for creation of a cashless infrastructure, promoting greater usage of non-cash modes of payments and making Aadhaar-based payments more prevalent4.

Issue of Rupay cards: National Bank for Agriculture and Rural Development (NABARD) plans to provide around 200,000 point-of-sale (PoS) machines in 100,000 villages and distribute RuPay cards to over 34 million farmers across India, to enable farmers to undertake cashless transactions5.

To conclude, the demonetisation impact increased the cash deposits in banks. Public sector banks are the biggest gainers of the rise in deposits, leading to lower cost of funds. Additionally, improvement in digital tools and equipment to execute bank transaction has avoided cash loss for various reasons like theft, dacoit and misappropriations. Hence, the upshot of demonetised currency paved way for the development of the country through financial institutions like Banks.      

 

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