Demonetisation effect: Deposits grow even after

rate cuts by banks

1 MUMBAI: Demonetisation has resulted in a rise in
deposit growth at a time when banks have reduced
interest rates on term deposits.

2Deposits rose 13.9% or Rs 12.7 lakh crore to Rs

105 lakh crore against a 10% rise last year,
according data released by the Reserve Bank of
India.

3The surplus liquidity in the banking system, created by demonetisation, will lower borrowing costs and increase the
access to credit. This will boost economic activity with multiplier effects, said Arun Jaitley, finance minister, during the
Union Budget speech on Wednesday.

4This growth was spurred by conersion of cash and currency into version of cash and currency into deposits as the
government banned . 500 and ` ` . 1,000 notes on November 8 in its effort to fight black money .People were forced
to deposit their old high-value currency notes with banks over November and December last year and the central
bank released cash at a slow pace.

While deposits grew, credit growth didn't pick up as it remained muted at around 5% with total outstanding bank credit
standing at Rs 74 lakh crore.

As a result, banks were forced to park surplus funds in government bonds which helped lower yields which, in turn,
has helped the government raise cheaper funds.
The negative impacts are because of regulation, costs of demonetisation, loss of opportunity
and short-term damage to economy.

1. The 100% cash reserve requirement (CRR) on incremental deposits meant that
banks did not earn any interest on Rs 3 lakh crore of deposits for nearly a
fortnight.
2. The waiver of ATM charges would result in banks losing Rs 20 in every
transaction.
3. The waiver of merchant discount rate on cards would result in banks losing 1%
in every card transaction.
4. Banks use third parties like cash logistics companies for cash transportation.
Moving out Rs 15 lakh crore of currency notes and moving in Rs 7 lakh crore plus
from currency chests would have cost several thousand crore.
5. As banks have been focused on exchanging currency notes, they have not been
able to sell any loan products.
6. Some SME businesses have seen their sales drop 5080% and could default in
their instalments. They wont immediately be classified as NPAs because of some
relaxations, but if the delay persists bank NPAs might worsen.
7. Uncertainty has resulted in drop in spending on high value items from credit
cards. These are the transactions which are converted into EMIs and banks earn
from them.
Demonetisation effect: Banks aim to
boost credit growth with sharp rate
cuts
Banks, led by market leader State Bank of India, announced sharp cuts to their
lending rates after a recent surge in deposits, raising hopes that lower
borrowing costs will help spark credit growth in Asia's third-largest economy.

SBI, the country's biggest lender by assets, said on Sunday it had cut its so-
called marginal cost of funds-based lending rates (MCLR) by 90 basis points,
while unveiling new products for mortgage loans, one of the fastest-growing
areas.

Several other lenders including Punjab National Bank, Union Bank of India,
Kotak Mahindra Bank and Dena Bank also cut their lending rates by 45-90
basis points across tenures. Analysts expect more lenders to follow suit.

Banks have received an estimated 14.9 trillion rupees ($219.30 billion) in old
500, and 1,000 rupees notes from depositors since Prime Minister Narendra
Modi's government on Nov. 8 unexpectedly banned the banknotes in a bid to
fight counterfeiting and bring unaccounted cash to the economy.

That had raised expectations banks would have room to cut lending rates,
which is seen as vital to increase credit growth and spark a revival in private
investments.

Arundhati Bhattacharya, chairman of SBI, said at a news briefing on Monday,

the rate cuts were intended to "jump start" credit growth and could raise it by
100-200 bps in the year ending in March.

SBI now expects credit growth for 2016/17 fiscal year to be 8-9 percent,
Bhattacharya said, still lower than the lender's previous formal guidance of 10-
12 percent growth.

Any signs of a revival in credit could ease some of the worries from Modi's
move, which has sparked a severe cash shortage that has paralyzed parts of the
economy.
A private survey on Monday showed factory activity plunged into contraction
in December as the currency crackdown severely hurt output and demand.

Although India's gross domestic product grew 7.3 percent in the July-
September quarter from a year earlier, the fastest pace of growth among large
economies, much of that has been led by consumer demand.

MARGIN PROTECTION

Worries that profit margins at banks would be hurt hit the shares on Monday,
with SBI falling 2.6 percent.

But lenders took steps to protect their margins. SBI, for example, raised the
premium it charges on home loans to 65 basis points above the reduced one-
year MCLR of 8 per cent, according to details released on Monday.

The rate cuts also come after Prime Minister Narendra Modi on Saturday
admonished banks to "keep the poor, the lower middle class, and the middle
class at the focus of their activities," and to act with the "public interest" in
mind.

Modi's comments were made in a special New Year's eve speech in which he
defended his ban on higher-value cash notes and announced a slew of
incentives including channeling more credit to the poor and the middle class
.
"The combined impact of banks cutting lending rates and subvention provided
by the government to small businesses is likely to help turn around growth
faster than expected in the next fiscal year," said Saugata Bhattacharya, chief
economist at Axis Bank, the third-biggest Indian lender.
Banks have gained deposits substantially after demonetisation which they can invest for
improving their profitability. There non-performing advances have also come down.

Besides as banks will reduce their cash holdings due to more digital interface it will add to
their long term profitability and cash loss for various reasons like theft, dacoity and
misappropriation will be avoided.

Cash is an idle asset and it doesnot yield any income unless kept in a bank. So people will
keep their surplus cash in banks instead of at home.

However, during November and December bank work was largely centered on accepting
and exchanging specified bank notes. As a result other activities like lending during busy
season is affected which will reduce their earning for the next quarter and profitability.

Further as all ATMs are to be recalibrated for issue of new denomination notes like 2000
and 500 it will add substantially to their operational expenses. It will reduce their income
during the next quarter.

As people are not very much versatile with digital operations, they may face various
operational risks like cyber fraud.

Thus demonetisation is not an unmixed blessing but merits are more than demerits and the
economy will move forward with less cash holdings by banks.

The pace of deposit growth can slow down in the coming months with more and more new currency coming back into
the system.
Comments(1)
What is CASA?
CASA is abbreviation of Current Account Savings Account. It is the ratio which indicates how much
of the total deposits with the bank are in the current account and savings account. In a simple
language, the deposits lying in the savings and current account are CASA.
How does a higher CASA indicates acche din for banks?
As stated above higher CASA means large amount of deposits are in current and savings account.
This way the banks get funds at no or very low cost (interest). Banks do not pay interest on the
current account deposits and pays a very low % of interest on savings account deposits. Hence, it is
a good measure to get deposits at no or very low cost.
The banks are expected to make a good profit which would eventually benefit the common
men. How?
As the banks get a lot of liquidity in their hands, they will lend the money to the people at a lower rate
of interest. Hence, the interest rate on borrowing will lower down.
Further, as the CASA increases the banks will not need any other way to get money(loan from RBI
or other commercial banks).
From the stock market point of view, yes, it can be considered as a good opportunity to invest in
Banking stocks for long term.
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State Bank of India (SBI) managed to restrict NPAs to Rs 1.08 lakh crore for
December quarter compared to Rs 1.06 lakh crore for September quarter.
However, they posted a 134 per cent rise in Q3 net profit. While banks
like Punjab National Bank (PNB) and Bank of Baroda (BoB) reported a decline in
NPA.

SBI, accounting for almost hald of the banking sectors SME portfolio, said that it
is working on a scheme to support good small and medium units, which are
facing problems post-demonetisation, thereby slowing down the economy.

SBI MD Rajnish Kumar said, We are working on the modalities of a scheme for
SMEs with turnover up to Rs 25 crore. The scheme will be applicable to SMEs
which were making profits, and are now finding it difficult to service their loan
repayment or payment schedules.