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Impact of Demonetization on Banking Sector

Demonetization in India in 2016 led to the withdrawal of Rs. 500 and Rs. 1000 banknotes from circulation. This sudden announcement by Prime Minister Modi aimed to curb black money, counterfeit currency, and terrorist financing. It had both positive and negative impacts on the banking sector. Positively, it increased deposits, new accounts, and use of digital payments in banks. However, it also placed short-term strain on banks through increased transportation and employee costs without interest earned on surplus deposits. Overall, demonetization was intended to strengthen the banking sector through higher transaction volumes and reduced cash usage in the long run.

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Vatsal Changoiwala
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55 views10 pages

Impact of Demonetization on Banking Sector

Demonetization in India in 2016 led to the withdrawal of Rs. 500 and Rs. 1000 banknotes from circulation. This sudden announcement by Prime Minister Modi aimed to curb black money, counterfeit currency, and terrorist financing. It had both positive and negative impacts on the banking sector. Positively, it increased deposits, new accounts, and use of digital payments in banks. However, it also placed short-term strain on banks through increased transportation and employee costs without interest earned on surplus deposits. Overall, demonetization was intended to strengthen the banking sector through higher transaction volumes and reduced cash usage in the long run.

Uploaded by

Vatsal Changoiwala
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

DEMONATISATION

&
ITS EFFECT ON BANKING
SECTOR
What Is Demonetization?

 Demonetization is the withdrawal of a particular form of


currency from circulation.”

 It is a process by which a series of currency will not be


legal tender.

 The series of currency will not acceptable as valid


currency. 
BRIEF INTRODUCTION OF RECENT DEMONETIZATION:-

 On the evening of 8th November 2016, Indian prime minister Mr.


Narendra Modi announced a sudden demonetization of ₨.500 and
Rs.1000 rupees notes.

 Instead of RBI Governor Mr. Urjit Patel, surprisingly Prime Minister


announced the news of demonetization that these banknotes would not be
legal tender after midnight of 8th November.

 The high values will not be legal for transaction. Although the old notes
can be exchange from Banks & Post Offices till 31st December 2016.
Demonetization History and Background In
India
 This is not the First time, When Indian Currency is Demonetized in
India .

 Earlier it was done in 1946 with the complete ban of Rs. 1000 and Rs.
10000 Notes to deal with the unaccounted money i.e. Black Money. It
was done by British Governor General of India, Sir Archibald
Wavell

 Second time, it was done in 1978 by Govt headed by Mr. Morarji


Desai when Rs. 1000, Rs. 5000 and Rs. 10000 Notes were demonetized.
Scope of the Demonetization 

 Attack on black money holders.

 Death knell to fake currency rackets.

 End of terrorist funding.

 Transparency (online transaction = more transparency).

 End of huge donations.

 Hawala transactions end.

 Increase in GDP.
SHARE OF CASH IN VOLUME OF CONSUMER
TRANSACTIONS
120%

100%
100%
98%
96%
94%
90%
86% 85%
80%

65%
60%

55%

48%
40%

20%

0%
INDONESIA INDIA MEXICO SOUTH AFRICA CHINA JAPAN BRAZIL AUSTRALIA U.S. U.K.
Positive Impact on Banking sector
 The move towards a cashless economy will boost savings in financial assets.

 Demonetization has lead to inflow of cash in bank accounts.

 Increase in money supply and reduction in fiscal deficit lead to reduction in interest rate.

 Credit card and debit card usage up, outstanding payments zoom 39% a year after
demonetization.

 10 lakhs new accounts are opened.

 Increase of customers.

 Increase of deposits.

 Fall in cost of funds.

 UPI and advent of online banking.


Negetive Impact on Banking sector
 Loss of bank revenue in the form of no charge towards the ATMs.

 Banks didn’t have an interest on the surplus deposits.

 Increase in logistics expenses such as transportation vans.

 Sudden drop in consumers spending on high value items.

 Strain on employees.

 Waiver of merchant discount rate on cards.

 Not been able to sell any loan products.


Conclusion
 Demonetization is a tool used by central government to fight
against corruption and black money.

 It increased turnover and profitability of all commercial and


PSU banks, as the number of transactions increasing day to day
which gives positive impact on banking sector.
THANK YOU

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