Impacts of Demonetization on Banking Sector and Financial Sector.


On Tuesday 8th of November 2016 Indian government tripped 500 and 1000rupee currency units from it's status as a legal tender and the same was bursted all over the India. This procedure of detaching the currency from common usage and frosting the circulation of money in country created havoc and chaotic situation all over the country which impacted everyone in many ways.

This withdrawal of distinct currency from the market shaken the economy of India and led to the monetary revolution. Though this change was put forth for curbing corruption and vocalising counterfeit currency and black money indulgence in terror financing, but as said that "two proposed aims of the agenda are two different sides of the same coin" here also we have another aspect too. So here in this article author[1] attempts to explain the other side also and related aspects too. In this article author not only explains the economic impact but also attempts to explain the banking system improvisation and impact of demonetization in details. In general as expected there was positive impact of demonetization over Indian banking system over the financial statements records of scheduled and cooperative commercial banks. The portion of aggregate sum of money accumulated in the banks of India encountered dramatic spike and generated healthy surfeit liquidity conditions in economy and banking system of country. This exceptional increment in aggregate digits of accounts unleashed the plan of action of monetary policies like Pradhan Mantri Jan Dhan Yogna, Laksmi seva yojana etc and such accounts also get faced a significant impact of demonetization. Not getting the boundaries For reliance e-banking transactions also faced a surge due to this demonetization. In this article the author also tries to give the Vivid study of structural changes in highly descriptive way and author also uses concern data, facts and figures to support the abovementioned hypothesis.


The banking system plays significant and critical role in upgrading economic growth in many aspect from maneuvering the savings into investments to upgrading the administration resources efficiently. The recent observed factual corroboration in economy recommends that banking system of country put up vital support to economic growth and it get more improvised as it ameliorating the apportionment and maneuver the resources from savers to investors for the progress. After demonetization the currency circulation in economy increases 17% in Financial year 2019 from 18.03 trillion to Rs 21.1 trillion,[2] which impacted the Indian banking system. This boom in currency circulation in economy was foot of some positive change as one of the aim for banning the currency was on par at objective of progress but simultaneously this led to many questions on the financial burden of country. As stated above there was also bursting of bank accounts in India. Aftermath was that the number of bank account opening crossed 2 crore in zero balance savings bank accounts of Pradhan Mantri Jan Dhan Yojana since the government introduced demonetization on November 8, 2016[3]. The lengthy ques biding their time outside the bank for exchanging their old currencies with new one or depositing their old one not only this the there was also long columns of people for cash withdrawals outside banks and ATMs made the situation chaotic but as every change demands efforts so for betterment of society. RBI database released the figures and manifested that by 30 September 2016, the annual rate growth rate of bank credit in economy was about 12.1% and in the same grounds year-on-year growth rate started declining drastically and finally landed to 5.4% by end of March 2017.[4]


Legislature of India has demonetized money notes of categories Rs.500/ - and Rs.1000/ - with impact from 12 PM of November 8, 2016. The declared motivation behind this choice is to immobilize the load of dark cash and colossal sum fake notes in the framework. This progression has evoked differed response from people in general, for the most part identifying with issues being looked for store and trade of old notes for the new. A few responses have come, on suddenness of declaration of the plan without adequate earlier planning. It ought not be hard to value that component of mystery and shock is fundamental for such plans to succeed, if by any means. On the off chance that earlier notification in any structure was to be given, at that point the plan ought not be there in any case. Given the monstrous measurements and the chance of settling on mystery if expound earlier plans for conveyance of new cash were made, a specific measure of the hurdles in their aim roadmap and have invited the move by the Public authority. Never the less Government should carry the circumstance to ordinary soon to forestall any development of public resentment. This sudden decline in money available for use because of demonetization prompted a flood in bank. Complete money available for use declined by about ₹ 8,800 billion (₹8.8 lac crores). Thus, was generally reflected in sharp increment of about ₹ 6,720 billion (₹ 6.72 lac crores) in total accumulation of the financial framework even after outpourings in NRI deposits during that time frame.[5]

Between end of December 2016 and by early March 2017, there was a net expansion in cash availability for use by about ₹ 2,600 billion. During this period, money parked at bank with encountered additionally decline. And so resultantly loans and due payments were stretched out by banks expanded by ₹ 1,008 billion.[6] The steady credit store proportion for the time frame were just 18.2 percent. As the currency denomination of Rs.500 and Rs.1000 are most frequently used denominations for day-to-day transactions; they compounds nearly 86% of total money flowing in economy and market and visa vis 10.5% of GDP of the country. Therefore, every single independent individual, irrespective of his financial background were impacted by this unprecedented step of legislation. Likewise these money notes are supported as contender for forging, storing and psychological oppressor/wrongdoing financing too. That clarifies the expansiveness and profundity of this gigantic step by government.


Demonetization caused an abundance of hurdles in the banking sector of India and added to those challenges, banks were facing earlier. These impacts were lasted for short moment and applicated to long term agendas. This short term effect and moment, disturbed the banks and focused firmly to do bank activities and in since quite a while ago run it assisted and managed an account with pooling the money parked in bank without causing of any additional expense. There are positive and negative consequences of Post Demonetization on Bank tasks. Both have impacted Banks' liquidity and benefit and representatives as well. Here are some impacts of demonetization over banking operations.

1. Demonetization led to dramatic increment in deposits of Banks. Unaccounted and concealed money in denomination of Rs.500 and Rs.1000 were parked in the Banks and the proportion of deposits of banks encountered dramatic surge. It resultantly aided the banks to accumulate the deposits and savings.

2. After sharp ascent in money in bank on post demonetization, banks began loaning such overflow stores to the RBI under the opposite repo choices. PSU Banks, especially,

conveyed overabundance assets in government bonds. The profit from bond speculation is probably going to add 15 to 20 percent increment in the profit of banks.

3. Demonetization has affected public to come and execute exchanges with banks. It made even a non pay bunch individuals to visit bank and have a record. It expanded number of record holders in banks while expanding deposit corpus.

4. During demonetization, some SME organizations had seen their business drop by 50-80 percent and could default in their portions to banks. This drove the banks to consider it as NPA and influenced its level in banks.

5. Due to sudden onset of chaotic que of people at a bank made the Employees of banks very exhausted and due to limited number of workers the bank employee were trapped under enormous pressure and overtime work environment which impacted their work accountability. It weakened and devitalized them and impacted their life style too. The extremity were found when cases were discovered where the bank employees committed suicide, unable handling their work and work pressure.[7]


Gita Gopinath, Director of the Research Department at the IMF, Prachi Mishra senior employee of Goldman Sachs and RBI scholar Abhinav Narayanan, and Gabriel Chodorow-Reich, an associate professor of economics at Harvard university compiled the paper titled 'Cash and the Economy: Evidence from India's Demonetisation where they formulated and contrasted the idea of the impact of demonetization over Indian districts. They assessed that instant repercussions were to elevate the deposits of commercial banks as domestic deposited old notes but can not freely withdraw new denomination notes due to the cash crunch say of shortage.[8] Many learned economists and scholars like say Arun Kumar, C. Rammanohar Reddy and Raghuram Rajan observed that demonetization trend and the previous historical attempts at demonetization taken by other countries, such as North Korea, Myanmar and Nigeria concealed the facts that after the starting period of demonetization, the previous situation tends to repeat itself.[9]


The demonetization of the cash (Rs. 500 and Rs. 1000 notes) in November 2016 was one of the progressions taken by the administration of India. This choice way brings positive brings about the long haul, can be used as a tool by the legislation to combat corruption, black money, terror financing, etc which is not less than a curse on society. It is likewise presumed that the target to open the Pradhan Mantri Jan Dhan Yojna Record has been acknowledged and individuals utilized PMJDY accounts during the demonetization period which will change the mentality of the clients to utilize actual cash and clients will move to computerized banking administrations which will again be useful for the financial area just as clients. The study moreover recommends that the progression will help the financial business to keep up sufficient liquidity, minimization of non-performing resources, improvement of electronic banking administrations which will lessen the expense of items and administrations of banks and improve the productivity of the banking area. Specialists and scholars made an assessment that demonetization has assisted with lessening the flow of dark cash to a specific degree. Hopefully, we are getting miscellaneous impact on the economy and banking sector but hope we get desired dominant results.

[1] Anish sinha, 1st Year B.A LLB Law student, Asian law college, Noida [2],Currency%20in%20circulation%20increases%2017%25%20in,to%20Rs%2021.1%20trillion%3A%20RBI&text=Bank%20notes%20in%20circulation%20in,which%20was%20released%20on%20Thursday. [3] [4] [5] [6] [7] [8] [9]

20 views0 comments