Special Issue Published in International Journal of Trend in Research and Development (IJTRD),

ISSN: 2394-9333, www.ijtrd.com

Demonetization: Impact on Banking Sector
1
Dr.G.Uppili Srinivasan, 2Anandhi Eakamaram and 3Vincilin Nesamani
1
Head of PG Research, 2,3Research Scholar
1,2,3
Department of Commerce, Joseph Arts and Science College, Thirunavalur, TamilNadu, India

Abstract-- The move by the government to demonetize Rs.500 Why ban Rs 500 and Rs 1000 notes To avoid funding for anti-
and Rs.1000 notes by replacing them with new Rs.500 and social elements like smuggling, terrorism, espionage, money
Rs.2000 notes has taken the country with surprise.The laundering schemes, racketeering, and drug and people
government is to tackle the menace of black money, corruption, trafficking etc. This of course only scratches the surface: major
terror funding and fake currency. From a market perspective, industries such as real estate have historically been conduits of
we think that this is a very welcome move by the government black money. However, is that the share of large-value notes
and which has taken the black money hoarders with surprise. has only been increasing over the years. While some of this is
The total value of old Rs.500 and Rs.1000 notes in the no doubt due to the natural growth expansion of our economy,
circulation is to the tune of Rs.14.2 trillion, which is about 85% it also hints at the increasing size of our black money economy.
of the total value of currency in circulation. This means that the
Accepted the change & be the change So when someone asks,
total cash has to now pass though the formal banking channels
why do we need to suffer? I would like to say, please don't
to get legitimacy. The World Bank in July, 2010 estimated the
suffer, find an alternate. And when someone asks, why no
size of the shadow economy for India at 20.7% of the Gross
billionaire stands in a queue? Of course, the problem of a
Domestic Product (GDP) in 1999 and rising to 23.2% in 2007.
common man may get resolved by standing once or twice in the
Assuming that this figure has not risen since then (quite
queue, but, what solves the problems of a billionaire. She/he
unlikely though) and that the cash component of the shadow
just stays back home and finds the ways.
economy is also proportional estimated unaccounted value of
the currency could be to the tune of Rs.3.3 trillion. Now, post II. IMPACT OF DEMONETIZATION
the announcement of demonetization by the government this
It is too early to comment on the impact of demonetization or
money would have to either account by paying the relevant tax
and penalties or would get extinguished. There are higher effect of demonetization. This is still under implementation
chances of larger proportion of this unaccounted currency process. There are both positive and negative impacts of
demonetization.
getting as the tax rate and subsequent legal issues could be
prohibitively high for such money. Questions began to emerge. III. OBJECTIVES
Will it be effective if people can still create new black money
thereafter! Will it increase the GDP! Will it increase inflation! 1. Aimed at combating corruption. And Check black money
What about tax revenues! We look for answers. and fake currency note.
2. 1000 and 500 were put out of circulation and Effect on
In India, the Rs 500 and Rs 1,000 notes also constitute a huge
parallel economy.
percentage of the money spent by governments, political parties
3. All the bank accounts are tied up to one PAN (Permanent
and candidates during general elections. A Centre for Media
Account Number).
Studies report showed that nearly Rs 30,000 crore was spent
during the 2014 general election, while official spending only 4. This move shows strength of the Banking system, Retail
accounted for Rs 7,000-Rs 8,000 crore. boost, and increases deposit.
5. This move will also cause short-term pain for the working
I. DEFINE DEMONETIZATION class, small businesses and nearly anybody who deals with
cash on a daily basis.
Demonetization - ending something, termination, conclusion as
6. Remove black money from the economy as they will be
no longer the legal tender of a country. The act of ending
blocked since the owners will not be in a position to
something; "the termination of the agreement".
deposit the same in the banks.
"There is a famous saying in Telugu, the one who gets caught
doing a mistake is a thief, and the one who doesn't get caught,
IV. DISADVANTAGES
and doing the same mistake is a king".
1. The numbers and calculations for this are mind-boggling. 1. People who are in village, remote areas would not that
According to the RBI press conference, there are 16.5 much aware of demonetization, might not be able to
billion ‘500-rupee’ notes and 6.7 billion ‘1000-rupee’ exchange their money.
notes were circulated. Which according to the government 2. Farmers who don't have an account in banks won't be able
would be limited in circulation. to change their whole cash into new currency as there are
2. Of this Rs 500 notes constituted almost 45% of the limits imposed.
currency in circulation while 39% of the notes were of the 3. If somebody and couple who’s has left his family was
Rs 1,000 denomination. In value terms. However Rs 10 against their marriage without any Identity proof won't be
and Rs 100 notes constituted 53% of the notes in able to change their money, and will be left with nothing
circulation. but paper in their hand.
3. The Financial Action Task Force, a global body that looks 4. Poor people who work on daily wages won't be able to get
at the criminal use of the international financial system. their wages as there is shortage of cash.
4. In two words: black money. Unaccounted money, often 5. On the other hand, as analysts have noted, India’s larger
used in any form of corruption or illicit deals, usually takes and new-age companies will have no problems in making
the form of high-value notes, which in this case are the Rs the switch to Rs 2,000 notes.
500 and Rs 1,000 bills.

National Conference on Impact of Indian 500 & 1000 Rupee Note Demonetisation (NCIRD-17), Organized by PG and Research Department of Commerce,
Joseph Arts and Science College, Thirunavalur, Villupuram Dt, TamilNadu on 11th Feb 2017 17 | P a g e
 Special Issue Published in International Journal of Trend in Research and Development (IJTRD),
ISSN: 2394-9333, www.ijtrd.com
V. ADVANTAGES Definition: A non-performing asset (NPA) is a loan or advance
1. Limiting ATM withdrawals will encourage cash less card for which the principal or interest payment remained overdue
payments across the country.Interest rates: There should for a period of 90 days.
be a rise in bank interest rates.
Description:
2. Tracking of money is made easy as the exchange only
available by producing valid identity proof like Aadhaar, Banks are required to classify NPA further into substandard,
PAN, and Election Card. Doubtful and Loss assets.
3. Benami transactions will be blown away as the new
Credit risk
legislation provides a provision for seven-year
imprisonment or fine, or both. According to the Bank for International Settlements (BIS),
4. The decision results in more transparency in the Indian credit risk is defined as the potential that a bank borrower or
real estate industry, Housing prices may witness a counterparty will fail to meet its obligations in accordance with
downfall restoring demand in the housing segment. agreed terms. Credit risk is most likely caused by loans,
5. Higher Education and Healthcare transactions will come in acceptances, interbank transactions, trade financing, foreign
the reach of an ordinary man. exchange transactions, financial futures, swaps, bonds, equities,
6. The New digital Laws: step forward and bring more, new options, and in the extension of commitments and guarantees,
laws, and understand the safetyof digital banking. and the settlement of transactions.
These are the analyzed sectors that which most affected by de- In simple words, if person A borrows loan from a bank and is
monetization because of the high level of cash spending. not able to repay the loan because of inadequate income, loss in
business, death, unwillingness or any other reasons, the bank
1. Agriculture and sole traders,
faces credit risk. Similarly, if you do not pay your credit card
2. Household’s workers,
bill, the bank faces a credit risk.
3. Real Estate, Gold prices,
4. Banks, Entertainment/Restaurants, Market risk:
5. Beauty parlous and Tourism etc.
Market risk can be better understood by dividing it into 6 types
How will demonetization affect banking industry? depending on the potential cause of the risk:
Now, with the massive, irreversible and comprehensive push on Interest rate risk: Potential losses due to fluctuations in interest
‘going cashless’ and ‘adopting digital’, the banking industry is rate.
going to adopt financial technology with a new scale and scope.
Investments will indicate the direction towards a system where Equity risk: Potential losses due to fluctuations in stock price.
intelligent technology and software takes care of most. Currency risk: Potential losses due to international currency
Banks are the back bone of tis entire process and also the exchange rates.
biggest beneficiaries. Post Complete exchange of currencies, Commodity risk: Potential losses due to fluctuations in prices
banks should benefit from higher deposits and transaction of agricultural, industrial and energy commodities like wheat,
volumes, lower cash handling costs and greater acceptance of copper and natural gas etc.
digital channels.
Operational risk:
To be secondary benefits for the insurance, asset/wealth
management companies through higher financial savings. Operational risk can be categorized in the following way for a
While the nifty closed 1.31% down, Bank nifty closed higher better understanding:
by 0.09% giving a confirmation of the same. Human risk: Potential losses due to a human error, done
Increased Deposits: willingly or unconsciously.

This development will increase bank deposits by 1 to 2% IT/System risk: Potential losses due to system failures and
compared to what they were before the demonetization scheme, programming errors.
deposit inflows, followed by sharp outflows. Though the Processes risk: Potential losses due to improper information
sudden withdrawal of 86% of currency (in terms of value) from processing, leaking or hacking of information and inaccuracy of
the economy will not reduce people's dependency on cash, bank data processing.
deposit levels will benefit in a "more meaningful fashion" once
the informal economy is brought into the formal economy over Liquidity risk:
the next few years. Liquidity risk as the risk stemming from the lack of
What is CASA? marketability of an investment that cannot be bought or sold
quickly enough to prevent or minimize a loss.
CASA is abbreviation of current Account Savings Account. It
is the ratio which indicates how much of the total deposits with Look at this risk like persona going to a bank to withdraw
bank in the current account and savings account. In a simple money. Imagine the bank saying that it doesn’t have cash
language, the deposits with the bank are in the current account temporarily! That is the liquidity risk a bank has to save itself
and savings account.Banks do not pay interest on the current from. And this is not just a theoretical example. A small bank
account deposits and pays a very low% of interest on savings in Northern England and Ireland was taken over by the
on account deposits. Hence, it is a good measures to get government because of its inability to repay the investors
deposits at no or very low cost. during the 2007-08 global crisis.

NPA: Reputational risk:

Just like any other institution or brand, a bank faces
reputational risk which may be triggered by bank’s activities,

National Conference on Impact of Indian 500 & 1000 Rupee Note Demonetisation (NCIRD-17), Organized by PG and Research Department of Commerce,
Joseph Arts and Science College, Thirunavalur, Villupuram Dt, TamilNadu on 11th Feb 2017 18 | P a g e
 Special Issue Published in International Journal of Trend in Research and Development (IJTRD),
ISSN: 2394-9333, www.ijtrd.com
rumors about the bank, willing or unconscious non-compliance Imaging Checks /
12% 72%
with regulations, data manipulation, bad customer service, bad Statements
customer experience inside bank branches and decisions taken Imaging Documents 7% 45%
by banks during critical situations. Every step taken by a bank
is judged by its customers, investors, opinion leaders and other Delivery System:
stakeholders who mould a bank’s brand image.
Business risk Internet Banking
3% 25%
Home Page
In general, business risk as the possibility that a company will Internet Electronic
have lower than anticipated profits, or that it will experience a 1% 15%
Office
loss rather than a profit. In the context of a bank, business risk
Telebanking 56% 88%
is the risk associated with the failure of a bank’s long term
strategy, estimated forecasts of revenue and number of other Smart Cards Debit
35% 70%
things related to profitability. Cards
Electronic Banking 12% 76%
Systemic risk
Systemic risk and moral hazard are two types of risks faced by Strategy for the future
banks that do not causes losses quite often. But if they cause
losses, they can cause the downfall of the entire financial CONCLUSION
system in a country or globally. Banks won’t not be impressively wedged inside the long run,
considering that the cash streams of the beneficiary segment
Mobile banking services:
square measure ordinarily inside the littler division. We tend to
1. Account information trust the aggregate measures taken to reign in dark money can
2. Mini-statements and checking of account history enhance keeping money propensities, deliver cash and value-
3. Alerts on account activity or passing of set thresholds based history the basic structure of the bank is increasingly in
4. Monitoring of term deposits conflict with the changing product, delivery, and service needs
5. Access to loan statements of the customers the future belongs to financial service
6. Access to card statements provider’s not traditional banks. The vast majority of large
7. Mutual funds / equity statements banks, will create value networks. Doing so presents
8. Insurance policy management tremendous challenges. Banks will have to first develop a
comprehensive distribution system that will enable customers
Transaction
to touch them at multiple points. Banks must also create
1. Funds transfers between the customer's linked accounts performance measurement systems to assure the mix products
and Check Remote Deposit. and services they offer are beneficial to both the customer and
2. Paying third parties, including bill payments and third the bank. With other service providers. Nevertheless,
party fund transfers(see, e.g., FAST) technology alone will not solve issues or create advantages.
This technology needs to be integrated in an organization, with
Investments
the change management issues linked to people resisting new
1. Portfolio management services and Real-time stock quotes concepts and ideas. It also needs to support a clearly defined
2. Personalized alerts and notifications on security prices and well communicated business strategy.
References
Support
[1] taxguru.in/.../demonetization-effect-banking-sector.ht...
1. Status of requests for credit, including mortgage approval, [2] www.bloombergquint.com/.../banking-sector-stands-
and insurance coverage t...2016 - Bank deposits will rise 1-2% compared to what
2. Check (cheque) book and card requests they were without the demonetization scheme.
3. Exchange of data messages and email, including complaint [3] www.researchandranking.com › Blog 2016 - Currency
submission and tracking Demonetization ... c) Higher household savings in
4. ATM Location financial assets: Household sector saves ... Summary of
Content services macroeconomic impact...
[4] http://taxguru.in/rbi/demonetization-effect-banking-
1. General information such as weather updates, news sector.html#sthash.uOs859u9.dpuf
2. Loyalty-related offers and Location-based services. [5] http://www.bloombergquint.com/business/2016/11/16/ban
Technology usage: king-sector-stands-to-benefit-from-demonetisation-says-
moodys
TECHNOLOGY CURRENT USE IN NEXT [6] https://monishborah.wordpress.com/2016 - The World
USE 3 YEARS Bank did not mention the percentage of black money is
INFRASTRUCTURE 20% across all...
PC Networks: Tellers 48% 80%
Sales Tracking Software 44% 80%
Relational Data Base 36% 76%
Automate Credit Scoring 8% 48%
E-mail 60% 95%
Equipment Management
33% 57%
Software

National Conference on Impact of Indian 500 & 1000 Rupee Note Demonetisation (NCIRD-17), Organized by PG and Research Department of Commerce,
Joseph Arts and Science College, Thirunavalur, Villupuram Dt, TamilNadu on 11th Feb 2017 19 | P a g e