A Refereed Monthly International Journal of Management
Impact of Demonetization on Indian Banking Sector “A Step towards Governance”
Author
|
Nitin Bansal
Research Scholar
Banasthali Vidhyapith, Jaipur, India
Contact No.:- +91-7055890989
E-mail:- bansal.nitin@rediffmail.com
|
Abstract
Government of India has demonetized the currency of Rs.500 and Rs.1000 on 8 th
November 2016, aimed to address corruption, counterfeit currency, black money and
terror financing. The total value of demonetized currency was Rs. 15.4 trillion,
which constituted around 86.9% of total currency in circulation. The study conducted
in this paper reveals that demonetization influenced various economic sectors differently.
The highly impacted period due to demonetization was experienced especially during
November and December 2016. This impact was moderated prominently in the month of
January 2017 and immoderate to a longer extent by mid of February 2017. As an impact
of demonetization on Indian banks, there is a positive change in the financial statements
of scheduled commercial banks. The quantum of amount deposited in the banks has
raised and created surplus liquidity conditions. A significant increase in total
number of accounts opened under the scheme of Pradhan Mantri Jan Dhan Yogna and
the amount deposits in these accounts have also increased. A significant impact
of demonetization has also been monitored in the use of electronic banking transactions.
This study is descriptive in nature and the data has been taken for the period of
pre-demonetization and post-demonetization.
Keywords: Demonetization, Banks, Liquidity, Digitalization, PMJDY,
Currency in circulation.
Introduction
Kumar and Kumar (2016) stated that on 8th November 2016,
Indian government has withdrawn the currency of Rs. 500 and Rs. 1000 notes from
the circulation and declared this currency would not be a legal tender now onwards.
The total value of such notes was Rs. 15.40 trillion, which constituted 86.9 percent
of the total value of currency in circulation. Preethi and Sangeetha (2017)
mentioned that the government was in continuation of a series of measures taken
during last two years to eliminate black money, corruption, counterfeit currency,
terror funding, and to help the Indian economy by greater digitization, increased
flow of financial savings, higher GDP and tax avenues. India is a cash intensive
economy. According to the report of the committee on Digital Payments in 2016 which
was chaired by Mr. Ratan Watal, in India 78% of all consumer payments are affected
in cash and only 22% of all consumer payments are affected through digital mode
either through net banking, cheque transaction and others. As per the report available
in July 2010 provided by World Bank , India had the shadow economy of 20.7% of its
GDP in year 1999 and it increased up to 23.2% of Gross domestic Product in 2007.
According to Singh and Singh (2016) demonetization means termination
of an agreement which means to withdraw the particular currency from the economy
which was in circulation earlier. Digitization means to offer the products and services
through electric channels of bank with the help of internet. Negi and Pant (2017)
stated that banking is a service industry and now a day banks are catering to the
services at the finger tips of customers. One of the most influenced sector from
demonetization was banking industry and it made vibrations in the operations as
well as products and services of banks. Tharoor (2016) mentioned
that demonetization created higher demand to digital banking services in which cashless
transactions are prioritized. Digitization made significant influence on management
of liquidity and its demand raised by customers in the exchange of their demonetized
currency notes. Most of the banking operations were disturbed during the period
of demonetization and the bank employees have worked under unconditional stress
in extended working hours . Sinha and Rai (2016) stated that during
demonetization period there was an inflow of huge quantum of funds being deposited
and exchanged in bank branch, increase in the number of foot falls in bank branch,
significant increase in the banking activities and increase in the volume of number
of transactions through banks and on the other hand demonetization also created
multiple problems for the customers as well as for employees.
Shukla (2017) stated that government of India had permitted to
circulate the demonetized currency for purchase of railway tickets, purchase of
petroleum products, purchase of medicines and payments of hospital bills, purchase
of milk at milk booths and at state and central government authorized consumer cooperative
stores. Bansal and Singh (2018) stated that various determinants
of automatic teller machine have played a prominent role in digital banking. These
determinants have a significant impact on the customer satisfaction. Ramdurg
and Basavaraj (2016) mentioned about the currency in circulation which
plays a very prominent role to take the decision of demonetization. On 6th
November 2016, the currency in circulation was 17.99 Lakh crore. Currency in circulation
refers to the total currency available in market except currency available with
Reserve Bank and currency chests.
This study is an attempt to assess and evaluate the effects of demonetization on
banks liquidity and digitization.
Review of Literature
Rastogi (2018) studied the reasons of demonetization in India and
evaluated its impact on black money, fake currency, terror financing, note bank
politics, economic growth of India, cashless economy and stock market for pre and
post demonetization period and asserted that demonetization decision was taken on
right time as economy was performing well and could absorb the short term shocks.
Sarkodie (2018) examined the effect of demonetization on labour
class of Lovely Professional University and depicted the various reasons of failure
of demonetization. It is mentioned that demonetization was a great step but it could
not eradicate black money and having negative impact on poor class people.
Bansal and Jain (2018) examined the significant changes in the
utilization of digital banking services in India after demonetization using paired
sample T test and revealed that the usage of digital banking services in both the
terms i.e. volume wise and value wise has been increased after demonetization.
According to Kaur (2017) cashless payment system in the economy
has multiple benefits i.e. time saving, minimization of cost, green banking and
many more. In this study the future of all the transactions throughout the country
is expected through cashles transaction system only.
Singh and Singh (2016) described that demonetization was like a
surgical strike on black money and in first 3 days Rs. 35,000 crores deposited in
banks and around Rs. 1500 crores black money were destroyed.
Rao et. al., (2016) studied the impact of demonetization on the
basis of demand for cash by various agents in economy. There are four types of transactions
which are unaccounted transactions, illegal transactions, informal sector transactions,
and accounted transactions. The effect of demonetization was on all these transactions.
Pulla (2016) discussed about the digitalization of Indian economy.
He discussed various projects taken by government of India like Digital India, Bharat
Net, DigiGaon. It is stated in the study that digitalization reduces the tax evasion
and enhance the tax revenue to the government.
Paramahansa and Eliot (2017) portrayed the long term advantages
and short term cost of demonetization. This study reveals the advantages as well
as adverse effect of cashless economy. Besides this the effect on circulation of
currency, gross domestic product, black money, corruption and taxation were highlighted.
Uke (2017) researched on demonetization and its effects in India
and studied supportive and adverse impact of demonetization in India. The prime
objective of demonetization was to eradicate the black money and diminish the corruption.
In this act, government of India has become success to some extent and the real
positive impact will be in front of all in future.
According to Singhal (2017) in research on demonetization and E
Banking in India. In this study it revealed that urban male youth have higher awareness
about electronic banking services even prior to demonetization and after demonetization
the proportion of the customers using electronic banking services has been increased
substantially.
According to Gajjar (2016) in her study on black money in India
described the policy options, strategies and framework that should be adapted by
Indian government to tackle the issue of black money and various future challenges
to be faced by government.
According to Nithin and Sharmila (2016), demonetization has short
term adverse impact on various sectors of Indian economy and such impact are solved
with the availability of new currency notes widely circulated in the economy. This
study also argued that the Indian government should solve all the issues created
because of demonetization and help the economy to work in a smooth way.
Antony and Maheshwari (2017) examined the demonetization and its
financial inclusion in all aspects. The study reveals that the rewards of demonetization
are encouraging and the outcomes are in the interest of the country in long run.
It influenced the banking industries to invest on the digitization of all banking
services.
Chatterjee and Banerji (2016) discussed about the short term liquidity
problem in Indian economy and substantial increase in the deposits in banks due
to demonetization. The study reveals that spending patterns and consumption trends
in the Indian economy changed in the short period of time and people changed their
attitude to use alternate channels of payment for purchasing.
Objectives of The Study
. To analyze the impact of demonetization on the financial statements (balance sheet)
of Scheduled commercial banks in India.
. To study the deposits trend under Pradhan Mantri Jan Dhan Yojna accounts.
. To study the positive and negative outcomes of demonetization on banking operations.
. To assess the impact of demonetization on the liquidity position of Scheduled
commercial banks.
. To evaluate the impact of demonetization on currency in circulation and GDP ratio.
Research Methodology
This research paper is based on secondary sources of data. The used data has been
taken from authenticated sources such as books, journals, RBI website and relevant
government websites. The research is descriptive in nature. The period of the study
is from November 2016 to March 2017.
Data analysis and interpretation
Balance sheet effects of scheduled commercial banks: As an effect of demonetization,
there was a decline in currency in circulation led to an upswing in the bank deposits.
The demonetized currency was taken by banks at bank counters till December, 30th
2016. There was an acute decline in the circulated currency by about Rs. 8800 billion
between 28 th October 2016 and 6th January 2017 (i.e. days
exactly prior to and later demonetization for which banks usually provides fortnightly
data). As a result it majorly enhanced about Rs. 6720 billion in aggregate deposits
of the banking system.
During this period re-monetization has shown a significant progress at a faster
pace. Beginning with the last week of December 2016 to the first week of March 2017,
a positive change in the circulated currency to the extent of Rs. 2600 billion has
been reported. During this time period there was a moderate decline in deposits
with banks.
Usually bank provides the data of its prominent assets and liabilities on fortnightly
basis. According to the data provided by banks for the period of 28th
October 2016 (pre demonetization) and 17th January 2017, the total deposits
of scheduled commercial banks have enhanced by Rs. 5549 billion during this period.
Table 1: Variations in prominent assets and liabilities of Scheduled
Commercial Banks (28th October 2016 to 17th January 2017)
(Rs. Billion)
|
Liabilities
|
Amount
|
Assets
|
Amount
|
|
Total deposits
Borrowings
|
5,549
-56
|
Bank credit
Investment in Govt. Securities
Net other assets
|
1,008
4,560
-75
|
|
Total
|
5,493
|
Total
|
5,493
|
Source: RBI website
Bulk of the money deposited in banks were deployed in (a) reverse repo of various
tenors with the reserve bank of India; (b) Investment in government securities by
issued cash management bills; (c) Loans and advances given by banks increased by
Rs. 1,008 billion. During this period the incremental credit deposit ratio(ICDR)
was only 18.2%.
Liquidity concerns
With the announcement of demonetization, bank customers returned specified bank
notes (SBN) to the banks (i.e. Rs. 500 and Rs. 1000 notes). This surprise step increased
the quantum of deposits enhanced surplus liquidity concerns in the banking sector.
The Reserve Bank of India has managed the excess liquidity concerns in 4 phases
as mentioned in chart 1.
(a) First phase from 10th November 2016 to 25th November 2016:
The RBI applied liquidity adjustment facility through changing reverse repos of
different time periods ranging from 15 days to 91 days and adjusted excess liquidity
of banks.
(b) Second phase from 26th November 2016 to 9th December 2016:
The excess liquidity was absorbed with the variable reverse repos and the incremental
cash reserve ratio of 100% on the increase in net demand and time liabilities from
16th September to 11 th November 2016. It helped to drain
about Rs. 4,000 billion excess liquidity during the fortnight ended 9th
December 2016.
(c) Third phase from 10th December 2016 to 13th January 2017:
The excess liquidity was managed with the mix of various reverse repos and by issuance
of cash management bills through an enhancement of the limit from Rs. 300 billion
to Rs. 6,000 billion on 2 nd December 2016 by the Indian government.
The maximum surplus was managed on 4th January 2017 of Rs. 7,956 billion,
out of which Rs. 2,568 billion managed by reverse repos and Rs. 5,466 billion through
cash management bills.
(d) Fourth phase from 14th January 2017: The surplus liquidity was managed
by mix of reverse repo operations, specially the liquidity released through the
maturing cash management bills.
The government also instructed to deposit maximum amount of Rs. 50,000 in Pradhan
Mantri Jan Dhan Yojna accounts on 15th November 2016. On 1st
March 2017, although the balances declined to Rs. 643 billion but still were 41%
higher as on 9th November 2016. The accounts opened under PMJDY contributed
4.6% in total accumulation of aggregate deposits of scheduled commercial banks in
the period of post demonetization.
Table 2: Amount deposits in PMJDY: Number of Accounts (in million)
|
Bank Group
|
As on 9th November 2016
|
As on 1st March 2017
|
Variation (1.3.17 over 9.11.16)
|
|
Rural
|
Urban
|
Total
|
Rural
|
Urban
|
Total
|
Rural
|
Urban
|
Total
|
|
Public sector banks
|
114
|
89.3
|
203.6
|
122
|
100.8
|
223
|
7.8
|
11.5
|
19.3
|
|
|
|
|
|
|
|
|
(6.8)
|
(12.9)
|
(9.5)
|
|
Regional rural banks
|
37.1
|
6
|
43.1
|
40
|
6.4
|
46.4
|
2.9
|
0.4
|
3.3
|
|
|
|
|
|
|
|
|
(7.8)
|
(6.8)
|
(7.7)
|
|
Private sector banks
|
5.3
|
3.1
|
8.4
|
5.4
|
3.6
|
9
|
0.1
|
0.5
|
0.6
|
|
|
|
|
|
|
|
|
(1.3)
|
(16.8)
|
(7)
|
|
Scheduled commercial banks
|
157
|
98.4
|
255.1
|
168
|
110.9
|
278
|
10.8
|
12.5
|
23.3
|
|
|
|
|
|
|
|
|
(6.9)
|
(12.7)
|
(9.1)
|
Note: Figures in parentheses are percentage variations.
Source: Website of Pradhan Mantri Jan Dhan Yojna
Table 3: Deposits Under PMJDY : Amount Mobilised
Currency in circulation (CIC) and GDP
India was facing an issue of high CIC in comparison to Gross domestic product of
the country as CIC reached upto the level of Rs.17.977 lakh crore as on 4th
November 2016, even it was Rs.13.715 lakh crore as on 23rd May 2014.
After demonetization it has been monitored that CIC has touched Rs. 8980.17 lakh
crore as on 6th January 2017. In the financial year 2016-17 CIC to GDP
ratio has been reported as 8.8% which is quite low in comparison with the financial
year 2015-16 when the ratio was 12.20%.
Source: Reserve Bank of India website
Significance and Conclusion
The demonetization of the currency (Rs. 500 and Rs. 1000 notes) on 8 th
November 2016 was one of the step taken by government of India. This decision way
fetch positive results in the long term. This study concluded that the step of demonetization
improved the liquidity position of the scheduled commercial banks in India and banks
invested the excess amount in various investment opportunities which helped the
banking sector to increase their profitability position. It is also concluded that
the objective to open the Pradhan Mantri Jan Dhan Yojna Account has been realized
and people used PMJDY accounts during demonetization period which will change the
attitude of the customers to use physical currency and customers will shift to digital
banking services which will again be helpful for the banking sector as well as customers.
Study also suggests that the step will help the banking industry to maintain adequate
liquidity, minimization of non performing assets, optimization of electronic banking
services which will reduce the cost of products and services of banks and enhance
the profitability of banking sector. This move will also help to reduce fiscal deficit,
control on inflation, lower corruption, improved tax compliance, elimination of
counterfeit currency and sustainable economic growth in long run. In the “post demonetization”
era the currency in circulation is lower than pre demonetization period. Experts
are of the opinion that demonetization has helped to reduce the circulation of black
money to certain extent.
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