Demonetization and its impact on the Financial Sector in India T. .M Jacob Memorial Government College, Manimalakunnu, Koothattukulam National Conference on Recent Macroeconomic Developments in India: Issues, Challenges and Remedies – 6-7, December-2017 Demonetization and its impact on the Financial Sector in India D Legio Meril Assistant Professor Department of Economics St. Xavier’s College, Thumba

Introduction Specified bank notes (SBN) in India which constituted 86.9 percent of the total currency in circulation was withdrawn Value of these currencies sums up to 15.4 Lakh Crore As per latest revelation by RBI, 99% of the currencies that were demonetized has come back into the system which amounting to Rs.15.28 Lakh Crore

Statement of the problem The financial sector is the backbone of all other sectors providing the funding requirement for their growth. It is essential to have a strong and green financial sector to support and catalyst the other sectors of the economy. The first impact of the demonetization would fall on the financial sector. Thus it is essential to understand how the financial sector was able to cope up with the avalanche of the withdrawal of currency notes. If the cushion provided by the financial sector was good enough then the incidence on the other core sectors could be curtailed to some extent. Thus the study is directed towards analyzing the impact of demonetization on the various financial sector segments.

To analyze the impact of demonetization on the financial sector. Objectives To analyze the impact of demonetization on the financial sector.

Research Methodology The study uses mainly secondary data. The data is collected from Basic Statistical Return of Reserve bank of India, RBI Annual Publication and reports. The period of study is from the pre monetization period to one year post demonetization. Simple statistical tools and graphs are used to analyze and interpret the data.

Currency Demand

Cont… Source: money stock measures, reserve bank of india bulletin, various issues.

Source: Weekly Statistical Supplement on notes issued, Reserve Bank of India, Various Issues.

Growth of Bank Deposits   Source: Commercial Bank Survey, Reserve Bank of India Bulletin, Various Issues.

Detection of fake currency notes During the financial year 2016-17, counterfeit notes numbered 762,072 pieces were detected and reported to Reserve Bank of India. The rate of fake currency notes detected per ten lakh pieces of notes processed at the currency chest of banks, the extended arms of Reserve Bank of India saw 7 pieces for Rs.500 denomination and 19 pieces for Rs.1000 denomination.

Cont…. At the time of demonetization on November 8, 2017 there were 632.6 crore pieces of Rs.1000 notes and 1,716.5 crore pieces of Rs. 500 notes. Forecasting a similar pattern of detection ratio of Fake Currency Notes, there can be an estimated stock of 1, 20,194 fake Rs.1000 notes and 1, 20,155 fake Rs.500 notes. This would amount to a total value of just Rs. 18 crore worth of fake currency notes in the system. The cost of printing the new notes to replace the withdrawn currency totaled a whopping 7,965 crore in the financial year 2016-17 as per the annual report of RBI.

Demonetization and monetary transmission Source: Weekly Statistical Supplement on Ratios and Rates, Reserve Bank of India, Various Issues.

Demonetization and Financial Savings Mutual Funds Insurance Companies Non Banking Financial Companies

Table 1: Net Inflows/Outflows in Mutual Funds (₹ billion) Category Nov 2015 - June 2016 Nov 2016 - June 2017 2015-16 2016-17 April-September 2017-18 Income / Debt Schemes -328.6 386.2 330.1 2131.5 676.1 Equity Schemes 235.7 670.7 740.3 703.7 803.6 Balanced Schemes 111.4 436.5 197.4 366.1 470.5 Exchange Traded Fund 75.5 203.8 78.2 232.8 72.5 Fund of Funds Investing Overseas -2.4 -1.9 -4.2 -3.6 -2.6 Total 91.6 1695.5 1341.8 3430.5 2020 Source: Securities and Exchange Board of India.

Table 2: Life Insurance Premium Insurance Companies Table 2: Life Insurance Premium (₹ billion) Month Private Insurance cos. y-o-y growth (%) LIC Grand Total Nov-16 35.3 48.9 125.3 141.9 160.6 112.7 Dec-16 47.5 28.4 82.6 12.8 130.1 18.1 Jan-17 44.1 23.8 87.2 29.8 131.4 27.8 Feb-17 39.4 13 68.5 -12.3 107.9 -4.5 Mar-17 93.8 17.8 253 7.5 346.8 10.1 Apr-17 25.6 22.3 44.3 -24.7 69.9 May-17 33.9 4.5 84.1 14.2 118 11.2 Jun-17 40.2 16.2 104.5 11.7 144.7 12.9 17-Jul 41.7 162.5 51.4 204.3 47.4 17-Aug 41.3 15.8 133.8 24.9 175.1 22.6 17-Sep 55.9 -1.1 153 37.6 208.9 24.6 Nov-2016 to Jan-2017 126.9 31.8 295.1 53.5 422.1 46.3 Nov-2016 to Sep-2017 498.7 1298.9 22.8 1797.7 21.5 Source: Insurance Regulatory and Development Authority of India.

Non Banking Financial Companies Table 3: Disbursals by Non-Bank Finance Companies in India Category Monthly average disbursal (April-Oct 2016) in ₹ billion % Change over monthly average disbursal of April-October 2016 16-Nov 16-Dec 17-Jan 17-Feb 17-Mar 17-Apr 17-May 17-Jun Asset Finance Companies 186.8 -14.6 9.2 -6.9 -2.5 48.7 -10.4 1.1 22.8 Loan Companies 611.6 -24.7 -22.5 -19.3 -12.6 39.9 4.5 7.1 13 Micro Finance Companies 94.1 -63.2 -71.4 -56.5 -42.3 -5.8 -47.8 -11.3 -15.3 Source: Business of Non Banking Financial Companies, Quarterly Report April 2016 to September 2017 Reserve Bank of India.

Conclusion The currency in circulation has moved back to the pre-demonetization level in all dimensions. The deposits growth in the commercial banks was just transitory in correlation with temporary fall in the currency demand. The excess liquidity that was created in the system has done more harm than good with banks reeling in non-performing assets and lack of credit demand from corporate companies who too is showing no signs of recovery.

Cont… The fake currency detection too is mearge in relation to the overall cost involved in executing the exercise. The monetary transmission through the demonetization process seems not to have reached the real economy with changes in policy rates is ineffective widely, with interest rates of various bank instruments failing to bring in the desired results. The financial saving too have not shown the desired results with mutual funds resource mobilization being transitory as is with premium collection of insurance companies and demonetization impacting the non banking financial companies badly.

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