Banks to bear brunt

First, dealing with unprecedented rush at branches will result in public anger against them as they lack proper infrastructure and manpower to extend hassle free services to such a huge number of customers in the given time.
Banks to bear brunt

Soon after taking over as Prime Minister of the country in 2014, Narendra Modi created enthusiasm among masses through mega financial inclusion schemes like Jan Dhan Yoajna and other social welfare schemes. But after two years of the rule, the masses lost this 'enthusiasm' to panic  when the prime minister on November 8 in late evening television address declared almost 86 per cent of the available currency in the country invalid. 

Though people have been left in a state of shock and confusion, it's the banking industry which is going to bear the brunt on two fronts. First, dealing with unprecedented rush at branches will result in public anger against them as they lack proper infrastructure and manpower to extend  hassle free services to such a huge number of customers in the given time. This amounts to breeding of disgruntled customers. Second, the banks would turn fundamentally weak. 

In other words, the current demonetization drive to phase out five hundred & one thousand rupee notes and for the first time pumping two thousand rupee notes in the financial system along with new notes of five hundred rupees has a huge impact on the banks which have been reeling under tremendous stress for the past few years on account of burgeoning non-performing assets (NPAs). The banks suffering losses in the past few quarters have been squeezed to 'exchange counters'. They have been forced to shift focus from recovery of bad loans, identified as most dangerous situation threatening even existence of some banks, to mere currency exchange outlets.

Notably, the Reserve Bank of India (RBI) has already asked the banks to clean their balance sheets by March 2017 by making appropriate provisioning for even stressed loans which the RBI considers as good as non-performing assets (bad loans). Even as the banks were strategizing 'effective recovery mechanism' to deal with bad loans within the stipulated time, demonetization derailed their 'loan recovery enthusiasm' with entire focus now to tackle huge rush of people seekingdeposit/exchange invalid notes. 

One of the most visible major benefits of this demonetization is that the banks would see huge surge in their deposit base, especially in low cost deposit segment as people would be depositing invalid notes mostly in Savings and Current Accounts. More strong the base of deposits of banks, more will be the liquidity position of the banks. This means, the banks would be able to lend more and loans will become easier to access. Even interest rates may come down. 

However, there is other side of the story. The surge in deposits will be more liability for the banks and they have to work extra hours to park these deposits in safe havens where the investment is not only productive but also safe. Creating a healthy credit portfolio amid today's worst scenario of bad loans would be a challenging task. So, the mounting deposit base can also turn problematic for the banks.

Curbs put on cash transactions will push the people to take route of alternative forms of payment. Electronic transaction systems, e wallets, e banking, usage of debit and credit cards, etc. will definitely witness considerable increase in demand. Precisely, it indicates that cashless transactions will become first preference of general public in the financial ecosystem. Card transactions will slowly replace the cash transactions even in day to day routine activities. So, this would necessitate for banks to have a vibrant and state-of-the-art electronic platform  to cater to the huge rush of e-transactions  expected after demonetization drive.

Parallel economy is not something that is unknown in our financial system. Black money and large volume of counterfeit currency are considered as pillars of this parallel economy. Demonetization of 500 and 1000 rupee notes and replacement of the same with new 500 and 2000 Rupee Notes is 'expected to address these two issues. However, stopping fake currency notes making way into the banking system through this mass deposit/exchange facility bears a question mark.

Meanwhile, demonetization is seen as a game changer which will deeply impact the property prices. Sale-purchase of property involves a combination of 'cheque' and 'cash' component. The 'cheque component' is the 'white' money, which is paid as per the prevailing circle rate. While the 'cash component' is the black money which is paid as the balance amount of the 'actual' deal value. The deal value is always much higher than the circle rates. It's here this black and white deal will get hurt and future transactions in property deals would be much more transparent and largely organised with 20-30% price correction.

(The views are of the author & not the institution he works for)

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