DEMONETIZATION OF BANKING SECTOR IN CURRENT SCENARIO

By
T.GEETHA
M.PHIL COMMERCE

ABSTRACT:

Everyone is aware about the demonetization policy of the government by banning Rs.
500 & Rs. 1000 currency notes. One can understand that it would have a pretty bad impact on
SMEs, small traders, real estate, transport sector, consumer durable goods industry. Not only
these sectors but it would major affect the rural areas business as over there, majority of the
transactions are made in cash. The ban of Rs. 500 and Rs. 1000 currency notes will impact those
industries where hardcore cash transactions are made. Demonetization will affect the liquidity,
but for a short term.

In this article highlight of Current scenario, The biggest beneficiaries banks, Impact of
demonetization in banking sector, methods of demonetization, government ordinance of 500 and
1000 rupees notes, Exchange of old notes, facts and figures and withdrawal limits.

INTRODUCTION:

Demonetization is the act of stripping a currency unit of its status as legal tender.
Demonetization is necessary whenever there is a change of national currency. The old unit of
currency must be retired and replaced with a new currency unit.

The opposite of demonetization is demonetization where a form of payment is restored as legal

tender.

Demonetized, Demonetizing.
1. To divest (a monetary standard or the like) of value.
2. To withdraw (money or the like) from use.
3 .To deprive (an issue of postage stamps) of validity by legal methods and without marking the
stamps themselves.

ADVANTAGES OF DEMONETIZATION:

1. The biggest advantage of demonetization is that it helps the government to track

people who are having large sums of unaccounted cash or cash on which no income tax
has been paid because many people who earn black money keep that money as cash in
their houses or in some secret place which is very difficult to find and when
demonetization happens all that cash is of no value and such people have two options
one is to deposit the money in bank accounts and pay taxes on such amount and second
option is to let the value of that cash reduced to zero.
2. Since black money is used for illegal activities like terrorism funding, gambling,
money laundering and also inflating the price of major assets classes like real estate,
gold and due to demonetization all such activities will get reduced for some time and
also it will take years for people to generate that amount of black money again and
hence in a way it helps in putting an end this circle of people doing illegal activities to
earn black money and using that black money to do more illegal activities.
3. Another benefit is that due to people disclosing their income by depositing money in
their bank accounts government gets a good amount of tax revenue which can be used
by the government towards the betterment of society by providing good infrastructure,
hospitals, educational institutions, roads and many facilities for poor and needy
sections of society.

DISADVANTAGES OF DEMONETIZATION:

1. The biggest disadvantage of demonetization is that once people in the country gets to
know about it than initially for few days there is chaos and frenzy among public as
everybody wants to get rid of demonetized notes which in turn sometimes can lead to law
 and order problem and chaotic situation especially in banks and ATMs which are the only
medium to change the old currency units to new currency units.

2. Another disadvantage is that destruction of old currency units and printing of new
currency new units involve costs which has to be borne by the government and if the costs
are higher than benefits then there is no use of demonetization.

3. Another problem is that majority of times this move is targeted towards black money but
if people have not kept cash as their black money and rotated or used that money in other
asset classes like real estate, gold and so on then there is no guarantee that demonetization
will help in catching corrupt people.

As one can see from the above that demonetization has both advantages and disadvantages and it
is up to the government to see and analyze all the pros and cons and then decide whether it is
beneficial to go ahead with demonetization or not.

CURRENT SCENARIO:

Before I state anything, a clear picture of all the banks and ATMs is present which depicts
todays reality. Long queue of people waiting for currency exchange or deposits outside the
banks and for cash withdrawals outside ATMs. But definitely this is for a short time.

Many industries are going to be benefitted due to the demonetization policy and many are
going to suffer. But overall the demand is going to or rather has already reduced by 30%-40%
due to lack of money with the consumers. As the demand goes down, the profits for the quarter
ending December16 is going to fall. The demand will catch the momentum as the dust settles
down. The economy will stabilize as soon as there is enough new currency in the hands of
people.

THE BIGGEST BENEFICIARIES BANKS:

Yes, the biggest beneficiary from this policy will be the banking sector. The reason
behind being called the beneficiary is very obvious because as lot of people are depositing cash
in the banks, there will be a lot of liquidity with the banks.
 As the deposits with the banks will increase so will increase the CASA, which will
increase the Net Interest Income and the Net earnings of the banks.

CASA is abbreviation of current account savings account. It is the ratio which indicates
how much of the deposits with the bank are in the current account and savings account. In a
simple language, the deposits lying in the savings and current account are CASA.

As stated above higher CASA means large amount of deposits are in current and savings
account. This way the banks get funds, At no or very low cost (interest).

Bank does not pay interest on the current account and pays a very low % of interest on
savings account deposits. Hence, it is a good measure to get deposit at no or very low cost.

As the banks get a lot of liquidity in their hands, they will lend money to the people at a
lower rate of interest. Hence, the interest rate on borrowing will lower down.

Further, as the CASA increases the banks will not need any other way to get money (loan
from RBI or other commercial banks).

From the stock market point of view, yes, it can be considered as a good opportunity to
invest in banking stock for long term.

IMPACT OF DEMONETIZATION IN BANKING SECTOR:

The asset quality problems for banks and finance companies are rising as small customers
continue to struggle with the adverse effect of demonetization.
But, it might show up only in the fourth quarter numbers, as the Reserve Bank of
India (RBI) has given an additional 60 days for lenders to classify accounts as non-performing.
According to public sector bank executives, the work pressure from managing deposits
and cash withdrawal is coming down and banks have begun to assess the impact
of demonetization on the loan side both asset quality and demand for credit. Risks of slippages
have increased and a picture will be clear at the end of the financial year. Karthik Srinivasan,
senior vice-president of ICRA, said delinquencies have increased as collections have gone down.
 The loss of income has severely dented the loan repayment ability of small borrowers.
Also, many of those bankers who were deployed for loan recovery were put on the job of
managing a sudden surge in activity at branches after demonetization. The combined effect will
be a rise in stressed loans by at least 100 basis points, said Abhishek Bhattacharya, director and
co-head (financial institutions) at India Ratings.
According to global rating agency Standard and Poors (S&P), many advances on banks
watch lists could also slip due to the cash crunch and a slowdown in business. Companies are
also affected by rising working capital cycles since they have to support the supply chain, which
often deals in cash. Therefore, borrowers at the margin could turn delinquent.
Abizer Diwanji, partner and national leader (financial services) at EY India, said although
people will resume payments, it would happen with a lag. It would take a couple of quarters
before payment patterns normalize. Highly cash-dependent businesses, especially small and
medium enterprises, will have a hard time in making payment. This will push the kitty of
stressed loans.
Bank chief executives in their pre-Budget (FY18) presentation to the finance ministry
said four sectors need attention. These are: Vegetable growers who depend on cash for their day
to day dealings and cant hold their crop for long, as it is perishable; brick-kiln laborers, as their
owners used to pay them in cash; the transport sector in rural India; and, plantations in the South.
An IDBI Bank executive said this quarter would see a severe impact
of demonetization on loan demand and slippages.
ICRA estimates 80-85 per cent of retail credit (of finance and housing finance
companies) is in the under Rs 1-crore loan size category. Non-banking financial companies and
housing finance companies operate largely in the self-employed borrower segment, which
conducts business mostly through cash transactions and thus is considerably affected by the
withdrawal of Rs 500 and Rs 1,000 notes.
The fallout of demonetization will be a drop in credit growth. Advances for the banking
system are expected to grow at 10-11 per cent in FY17. Now, credit may expand at a slower pace
of 5-6 per cent, Bhattacharya said.
Credit off take has already slowed drastically in the current financial year compared to
FY16. Banks disbursed Rs 89,500 crore from April to early December down from Rs
4,03,220 crore in the same period in 2015-16, according to RBI data.
 METHODS OF DEMONETIZATION:

The most interesting thing regarding the demonetization is that people are devising various
unique methods for transforming their black money in to white one. Some of these methods are
as follows:

Depositing money in the accounts of their poor relatives and friends.

Enticing the people with some percentage of money for exchange.

Asking their employees to stand in the long queues in front of Banks and ATMs for
getting money exchanged.

Hiring labors for some Rupees ranging from Rs 500/- to 700/- for becoming the part of
long queues in front of banks/ ATMs.

Converting black money in to gold.

Paying a few months salaries in advance.

Paying back loans forcibly.

Using their influence / links with bank employees and so on.

GOVERNMENT ORDINANCE OF 500 AND 1000 RUPEES NOTES:

The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was issued by the
Government of India on 28 December 2016 ceasing the liability of the government for the
banned bank notes, and also imposing a fine up to 10,000 or five times the amount of the face
value of the bank notes, whichever is higher, for people transacting with them after 8 November
2016; or holding more than ten of them after 30 December 2016. The ordinance also provided for
the exchange of the bank notes after December 30 for non-resident citizens and others on a case
by case basis.
 However, Petrol, CNG and gas stations, government hospitals, railway and airline
booking counters, state-government recognized dairies and ration stores, and crematoriums were
allowed to accept the banned 500 and 1,000 bank notes until December 2, 2017.

20

15

10

EXCHANGE OF OLD NOTES:

People gathered at ATM of Axis Bank in Mehsana, Gujarat to withdraw cash following
deposit of demonetized currency notes in bank on 15 NOVEMBER 2016

The Reserve Bank of India stipulated a window of fifty days until 30 December 2016 to
deposit the demonetized banknotes as credit in bank accounts. The banknotes could also be
exchanged over the counter of bank branches up to a limit that varied over the days:

Initially, the limit was fixed at 4,000 per person from 8 to 13 November.
 This limit was increased to 4,500 per person from 14 to 17 November.

The limit was reduced to 2,000 per person from 18 November.

All exchange of banknotes was abruptly stopped from 25 November 2016.

International airports were also instructed to facilitate an exchange of notes amounting to a total
value of 5,000 for foreign tourists and out-bound passengers.

FACTS AND FIGURES:

Up to 97% of the demonetized bank notes have been deposited into banks which have
received a total of 14.97 trillion ($220 billion) as of December 30 out of the 15.4 trillion that was
demonetized. This is against the government's initial estimate that 3 trillion would not return to
the banking system.

Of the 15.4 trillion demonetized in the form of 500 and 1000 bank notes of the Mahatma
Gandhi Series, 9.2 trillion in the form of 500 and 2000 bank notes of the Mahatma Gandhi New
Series has been recirculated as of 10 January 2017, two months after the demonetization.

WITHDRAWAL LIMITS:

Cash withdrawals from bank accounts were restricted to 10,000 per day and 20,000 per
week per account from 10 to 13 November. This limit was increased to 24,000 per week from 14
November 2016.

A daily limit on withdrawals from ATMs was also imposed varying from 2,000 per day
till 14 November, and 2,500 per day till 31 December. This limit was increased to 4,500 per day
from January 1, and again to 10,000 from January 16, 2017. Limits placed vide the circulars
cited above on cash withdrawals from Current accounts/ Cash credit accounts/ Overdraft
accounts stand withdrawn with immediate effect. The limits on Savings Bank accounts will
continue for the present and are under consideration for withdrawal in the near future. Limits
vide the circulars cited above placed on cash withdrawals from ATMs stand withdrawn from
February 01, 2017. However, banks may, at their discretion, have their own operating limits as
was the case before November 8, 2016, subject to 2 (ii) above.

EXCEPTIONS:

Under the revised guidelines issued on 17 November 2016, families were allowed to
withdraw 250,000 for wedding expenses from one account provided it was KYC compliant. The
rules were also changed for farmers who are permitted to withdraw 25,000 per week from their
accounts against crop loans.

CONCLUSION:

The demonetization measure is welcomed by majority of the people as 93 percent.

Government need to take all the necessary steps so as to ensure that there will be a smooth flow
of currency exchanges. It would turn into chaos it government takes no necessary steps to
circulate money correctly. It will make a massive change in our economy. We congratulate the
entire government and those hidden brains of our democracy who brought this decision. Overall
demonetization is a bold step towards good governance and transparency.

REFERENCE:

www.Taxguru.in

www.Livemint.com

www.Quora.com

www.New18.com

Demonetization and Its Impacts in India Prof Sandeep Kaur

p-ISSN: 2348-6848 e-ISSN: 2348-795X Volume 03 Issue 17 November2016.