We map the three major trends that are underway in banking operations post-demonetisation.
Demonetisation was the most shocking financial development of the year 2016. It upset the applecart for all – private individuals, black money hoarders, businesses and even banks. The programme was announced on November 8, 2016, and notes of Rs 1,000 and Rs 500 denomination were announced as an invalid tender from the next day onwards. The RBI allowed people who had the now defunct notes to deposit them in their bank branches and take the new notes of Rs 2,000.
The initial days…
The days following the announcement of demonetisation resulted in total pandemonium. The sudden announcement caught banks by surprise, and they responded by announcing a holiday on November 9 as they waited to get new currency notes from the RBI. Banks opened for business on November 10, 2016, to serpentine queues of people waiting from the early morning hours. People reasoned that if they reached early and stood in the queue, the chances of them getting money from the bank were higher.
This was the right decision for many. Banks were strapped for cash all through the month of November 2016 and even in December, as the RBI struggled to get the new Rs 2,000 and Rs 500 notes printed for dispensation. There was chaos as many people who stood in line for hours had to return empty-handed after they were told to try their luck the next day. Fights and scuffles with bank officials were common, as were heart attacks and stress-related deaths all over the country. Demonetisation affected banks’ working in three major ways, such as –
1 Dealing with unprecedented demand: The days of long lines at banks are now passé – it is now rare for banks to witness long waiting lines, since most banking operations are now conducted online and computerisation of processes has led to faster deliverables. But as waves upon waves of people showed up to deposit their defunct bank notes, banks had to put in extra working hours to meet the demand. Bankers also had to contend with aggressive customers who were in no mood to return from the bank without money. Counting the RBI’s daily stock issued in the morning and dividing it amongst customers in terms of Rs 4,000 and then Rs 5,000 and Rs 10,000 (as the stocks improved) became a daily chore. The banks had to absorb the customer influx also because ATMs remained closed – they were recalibrated one by one to dispense the new Rs 2,000 and Rs 500 notes.
2 A large upsurge in bank coffers: As far as banking was concerned, the best factor to emerge out of demonetisation was the fact that there was a sudden upsurge in deposits. Since people had money stored away in their homes and offices and which they were now forced to deposit in the bank till December 30, 2016, every person made their way to the bank to deposit money. This led to banks becoming flush with funds in a very short space of time!
Not only did the funds increase in size as each business day came to a close, they remained largely intact as people were unable to withdraw too much money owing to the caps on withdrawal limits. ATMs were also largely not functional in the initial days of the demonetisation programme. Hence, people could not immediately access their money. In the meantime, many banks enjoyed surplus liquidity.
As per some estimates, the bank deposits increased from Rs 107 lakh crore in October 2016 (before demonetisation was announced) to Rs 112.6 lakh crore in December 2016, after demonetisation. However, the country’s leading banks also opined that the joy over increased liquidity could well be short-lived, especially after caps on withdrawal were lifted. This concern proved to be prophetic in nature – the Government announced a total lifting of caps on withdrawals from savings bank accounts from March 1, 2017, while current account withdrawal limits were removed in January 2017. This means that the fund retention ratio could dip after March 2017, when people can withdraw large stocks of cash once again.
3 Fall in interest rates. The very first outcome of increased liquidity was expected to be a fall in the lending rates across banks, followed by financial institutions . However, the first rate cuts took place in unexpected quarters – in the arena of fixed deposits, to be precise. The country’s leading banks announced a straight 1% fixed deposit rate cut following an increase in deposits. In December 2016, home loan rates also came down to a low 8.6%. It is expected that banks may also revise interest rates for savings accounts.
4 Increased vigilance. Though the withdrawal limits for current accounts have already been withdrawn, and savings accounts will follow suit in March 2017, banks have now been expected to become extremely vigilant about every large transaction. It cannot be forgotten that the demonetisation exercise was aimed at cracking down on unaccounted wealth, a shadow economy that deals only in cash and is out of the tax ambit, andhawala transactions. Ever since demonetisation was announced, banks have been asking customers to quote their PAN numbers for large transactions, and diligently noting down the nature of big-ticket money transfers online. Even when withdrawal limits for savings accounts are relaxed, banks will have the mandate to ask customers for an explanation about why large sums of money are needed, and these withdrawals are expected to be noted to forward to tax authorities if needed. This means banks have now been empowered to watch over large transactions with a hawkish eye.