1. 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

2. 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Specified bank notes (SBN) in India which constituted 86.9 percent of the total currency in circulation was withdrawn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 Lakh Crore

3. 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.

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

5. 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.

6. Currency Demand

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

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

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

10. Detection of fake currency notes
During the financial year , 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 denomination.

11. Cont….
At the time of demonetization on November 8, there were crore pieces of Rs 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 as per the annual report of RBI.

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

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

14. Table 1: Net Inflows/Outflows in Mutual Funds
(₹ billion)
Category
Nov June 2016
Nov June 2017
April-September
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.

15. 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.

16. 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.

17. 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.

18. 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.

19. Thank You