3/10/2017 ImpactofDemonetizationonBankingthepositive&negative

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Impact of Demonetization on Banking
January 2017

The biggest bene ciary from Demonetizationwill be theBanking Sector November 2016

The governments decision on November 8 to immediately demonetize the Rs 500 and Rs 1,000 notes in circulation, which October 2016
account for 86% of all currency in circulation, has impacted a raft of sectors. Consumers have turned frugal, causing a sharp
drop in demand for goods and services. While farmers and small industries will bear the brunt and sectors like transport and September 2016
real estate will visibly be in pain, several other industrial sectors will have to scale back services or production.
August 2016
POSITIVE IMPACT: Increase in CASA deposits for most banks; lending rates to drop further
July 2016
The biggest bene ciary from this policy will be the banking sector. This is mainly due to the queues of people depositing cash
in the banks which will result in substantial 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. However, this will not be
abnormally high since the RBI has increased the CRR in the short term to mop up some of this liquidity. Categories

As stated above higher CASA means large amount of deposits are in current and savings account. This way the banks get Stock Markets
funds at no or very low cost (interest). Banks do not pay interest on the current account deposits and pays a very low % of
interest on savings account deposits. Hence, it is a good measure to get deposits at no or very low cost. Uncategorized

As the banks get a lot of liquidity in their hands, they are expected to enhance the borrowing cycle by lending the money at a
lower rate of interest. Hence, the interest rate on borrowing will lower down.

NEGATIVE IMPACT: MFIs, NBFCs miss collection cycles

NBFCs and micro nance institutions (MFIs) are under severe stress as their collection cycles (mostly in cash) have gone awry
post November 8. Most NBFCs and MFIs have announced collection holidays till such time theres suf cient money in the
system.

The governments demonetization drive may puncture the earnings of most banks this quarter. With most staffers handling
the Rs 500 and Rs 1000 note deposits, exchange and withdrawals, revenue-yielding operations such as vending loans and
cross-selling investment products have taken a backseat in most banks.

The earnings of banks may take a hit in the third and fourth quarter. We may not see loan book growth as most banks are
busy facilitating the demonetization process. Theyre not aggressively selling a lot of credit products now. That apart, the SME
and real estate sectors, to which most banks lend a signi cant part of their book are in a state of major ux.
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3/10/2017 ImpactofDemonetizationonBankingthepositive&negative

Temporary measures to mop up liquidity:

The Reserve Bank of India or RBI has announced incremental CRR (cash reserve ratio) of 100% on the growth in bank deposits
between 16 September 2016 and 11 November 2016. The entire incremental deposits (~Rs3.2 Tn) in the prescribed period
have to be parked with the RBI as CRR. No interest will be paid on CRR, while banks will have to shell out ~4% interest on the
funds received in savings deposits. Not only the expected positive carry on incremental deposits has been wiped out, but
there will also be a negative carry on such deposits. The higher CRR is a temporary measure to drain liquidity in the banking
system and will be reviewed in the fortnight ending 9 December 2016 or even earlier.

This is a temporary measure to suck out excess liquidity in the banking system after the announcement of demonetization by
the government as banks were parking bulk of the receipts through reverse repo window. Given the RBIs limited capacity to
accept funds under reverse repo and related interest out ow on the same, the central bank announced parking of incremental
deposits under CRR which entails no interest out ow.

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By smarteqt | November 29th, 2016 | Stock Markets | 0 Comments

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