INTRODUCTION

The objective of this study is to investigate about the impact of the

Demonetization over the banking sector. Demonetization is the act of removing
the current currency from the Economy and replacing it with the new one. It is the
step taken up by the Government Generally with the motive of removal of
corruption. Moreover it is the Act of depriving of Value of currency for official
payment. It does not only include the currency but also include the precious
metals. Originally Demonetization is the French word ―demonizes‖ dating back to
1850-55.

Demonetization refers to Withdrawal of a particular form of currency from

circulation. On Eve of 8th November 2016, the government announced the
demonetization of Rs.500 and Rs.1000 notes (almost 86% of the Currency), with
a stated three-fold objective of Fighting corruption, eliminating black money and
countering money laundering. In place Of the existing Rs.500 and Rs.1000
currency notes, new notes were introduced into the monetary system; the old
Rs.500 note was replaced by new note of Rs.500, Rs.1000Note was discontinued
and instead a new denomination of Rs.2000 note was introduced.

The Government issued a deadline of 31st December 2016 to exchange all Old
notes for new notes at banks and placed several restrictions on withdrawal of
Money from banks and ATMs during this switch over. In the three to four months
that followed the announcement, there was severe shortage of currency with banks
being Unable to meet the currency demand of their customers and Reserve Bank
of India (RBI) falling short of printing new notes on a timely basis to supply to
the banks, Leading to empty ATMs and crowded banks for weeks on end and
amounting to mismanagement of the monetary economic system at the highest
level. Banks are not exceptional from the influence of Demonetization and it made
vibrations in the operations as well as products and services of Banks.

It created greater demand to digital banking services where cashless transactions

are prioritized. It made greater influence on Management of liquidity and its
demand raised by customers in exchanging of their banned currency notes while
minimizing risk and maximizing quality of service. At the same time meeting the

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guidance of Reserve Bank of India was challenging. Demonetization has
disturbed the bank operations and made the employees to work under
unconditional stress in extended working hours of a day Hence, the present study
is made to figure out the influence of Demonetization on banking sector. It
showcases post Demonetization effect on banks and its operations.

The unique experiment with Demonetization, announced on November 8, 2016

by the Prime Minister has established that the Central Government is serious
about tackling the menace of Corruption. The relentless fight against corruption
was further reflected in the Union Budget of February 1, 2017 through restrictions
on funding of political parties and on cash transactions; and the current year‘s
budget (2018) includes some extensive provisions to push infrastructure for
Digitalization as well. The experiment of Demonetization by the Government has
largely been Successful in educating the masses about the benefits of electronic
payments and digitalization.

Initially, broadly, Demonetization of high currency notes had a two-fold objective

– first, choking the funding channels of militancy and terrorism from across the
border and to fight corruption. Since then, in continuing the focus on corruption,
government has placed emphasis on digitizing India. The amount of demonetized
notes which subsequently returned to the Reserve Bank of India (RBI) Between
November 8 and December 31, 2016 strongly demonstrates that corruption is
rampant in the economy.

The eradication of corruption is not only a social necessity but also has strong
Economic rationale. The war against the malaise of corruption has to go beyond a
series of surgical Strikes and needs precise planning with scenario analysis, and
then flawless execution. In that Respect, Demonetization of November 2016
deserves a contextual review wherein the government May consider strengthening
efforts to eradicate corruption from an exclusively tax-oriented Approach to a
broad-based approach. Prevention of corruption needs strong policy deterrence
which requires effective administration, and technology-based data processing to
generate actionable intelligence. Understanding Demonetization as a policy
instrument requires analyzing its effect on performance of the major
macroeconomic indicators.

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The trend from such analysis in the last one year since November 2016 indicates
that economy is recovering. The immediate pain in terms of non-Availability of
high value currency notes could have got reflected in reduction of output in
Agriculture, which might have in turn spilled over to industry and services. Due to
short-term nature of the liquidity constraint, it was expected that consumption
might not get impacted, as also Business investment which is largely based on
overall climate and interest rates. In the initial months, Demonetization was
expected to lead to lower conspicuous consumption and Real estate activity which
could result in suffering of residential investment, impacting nearly 300 Industries
which provide inputs in housing sector.

Therefore, India‘s growth rate in short run was A matter of concern. The
microfinance institutions, in the absence of high denomination notes, Could have
suspended some of their operations for a short time. In the long run, implications
were Uncertain. On one hand, confidence in efficient management of the
economy would have led to a Positive effect while a shock strike at unaccounted
economy could have led to shrinkage in Production, especially in the informal
sector including micro, medium and small enterprises. This paper attempts to
capture the course of the Indian economy since Demonetization of November
2016. An attempt is made to understand Demonetization in a continuum of other
major Policy reforms taken in the economy like GST, and Digital India.

The paper attempts to evaluate Major fiscal and monetary variables and their
trends pre and post- Demonetization along with an Analysis of sectorial
performance of economy during the period. To understand the developments in
Indian economy since Demonetization of 2016 requires Focusing on further
specific objectives to develop a deeper understanding:

1. To study the developments in fiscal and monetary variables since

Demonetization; Performance of macroeconomic indicators; and overall
growth trend in the economy.
2. To understand the progress in achievement of greater tax compliance,
formalization and Digitization through Demonetization.
3. To analyses overall impact on corruption and unaccounted economy since
the policy was announced
4. To understand progress made in transition of India from highly cash

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 dependent economy to less cash economy

Corruption, in socio-economic terms, has both direct and indirect costs. While the
direct costs are well known in terms of scandals and loss of confidence in
administration, the indirect costs are debilitating causing low growth and higher
income inequality. It can also erode the ethical standard of citizens.

Corruption undermines government‘s ability to deliver economic growth and

adversely affects a number of variables like macro financial stability, investment,
human capital formation and productivity. It weakens government capacity to
raise revenue and perform its core functions by diluting culture of complaints and
increasing tax evasion. It inflates costs in public procurement process and
undermines its quality. It can lead to distrust of government policy which if
becomes pervasive can lead to violence and conflict with social and economic
implications. It also impedes conduct of budgetary and monetary policy, weakens
financial oversight and hurts inclusive growth. Thus, corruption has significant
impact on macro-economic stability and sustainable Economic growth (IMF,
2016 and Baum, 2017).

The general costs also rise in the economy as citizens, manufacturers, and
industrialists factor Corruption in the pricing model. The uncertainty for firms in
turn hurts growth of economy. Social and environmental concerns are relegated,
and enforcement of environmental regulation suffers leading to more pollution
and over extraction of natural resources which also has health implications.

It can lead to political instability, conflict and policy paralysis as had happened in
the case of mining sector in India. Banking sector is the most significant sector in
an Indian economy, through the Indian government decision pertinent with the
demonetization immense influence on banking services.

Therefore, banking industry is one of the most important channeling for the
money circulation services; furthermore, it is the Most effected sector by the
demonetization decision. As a result, it is important a route For study its Impact
specifically on the banking loans and advances position which is a main restricted
access for Indian Banks. The present study perhaps will make people aware about
the positive as well as the negative dimension of demonetization on banking
sector in the direction of the policy makers.

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In addition to that, present Study could also provide an innovative circumstance
to trace the demand for loans and advances Position intended for Indian banks.

Bank deposits were increased at the privileged of bank interest rate during the
demonetization period, it led alarm rang out for the bank interest rates declined.
Demonetization steered the banks to accept foremost part of the deposits in the
form of cash, hence, results of this circumstances demanded to Banks decline the
interest rate over the banking deposits.

HISTORY OF DEMONETIZATION
IN INDIA

DEMONETIZATION OF 1946

In 1946, the currency notes of Rs.1,000 and Rs.10,000 were demonetized. The
higher denominations notes were not accessible to common people at that time.
So, the currency ban did not have much impact on the common people and the
Indian economy. Furthermore, it severely impacted functioning of State Bank of
India as there were only 71 bank offices at that time. The bank‘s profits also took
a hit and they were low as compared to that of previous years. The stock market
rallied for two continuous years post the Demonetization reflecting impact on
economic activity.

DEMONETIZATION OF 1978

In 1978, Government demonetized Rs.1000, Rs.5000 and Rs. 10,000 notes.

Similar to the recent episode, this action was kept confidential and yet an
ordinance was issued to carry out the exercise. However, that ordinance contained
sufficient measures for the exchange of the old notes and clearly stated the power
of central government in framing of the rules. There was a political angle
Involved

In 1978 Demonetization as the then newly formed Janata government wanted to

target some of the alleged corrupt elements in the government. The impact of

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currency ban on common people was limited as the demonetized notes formed
only a small portion of the total money supply.

DEMONETIZATION OF 2016

The exercise of Demonetization was carefully crafted as observed by the Prime

Minister in his televised talk on November 8, 2016 .This time the currency of 500
and 1000 notes are demonetized from economy. Where he mentioned about
completion of festive season and need for strong measures to defend India from
menace of counterfeit notes and corruption. The Government, given the
constitutional

Provision of right to life, permitted use of old notes in Government hospital for
medical treatment and buying medicine with doctor‘s prescription, and making
payments for milk and utility bills. To ensure convenience and freedom of travel
within the country, purchase of tickets for railway, bus and air travel were
permitted with old notes, and Toll on highways was exempted.

Similarly, grace period was offered on purchase of petrol, diesel, and gas and
LPG gas cylinders for cooking. To ensure comfortable international travel,
Use/exchange of old notes at international airports was also permitted. In view of
sowing season, Old notes were permitted to be used for purchase of seeds. For
general convenience payment of school fees as well as provisions for marriage
functions were also made. The Post Offices which have a significantly larger
presence in rural areas than commercial banks were also permitted to exchange
old notes. To address the emerging issues, given that 86 percent of the currency
was demonetized, 126 amendments were introduced in the course of 51 days.

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 OBJECTIVES OF THE STUDY

The key role of the researcher is to set the clear, unambiguous objectives of the
study which may prove helpful for the understanding the study. By keeping in
mind this fact I had set the following goals.

1. To understand the effect of demonetization in terms of positive or

negative.
2. To identify those accounts which are highly affected due to
demonetization?
3. To check the awareness of online banking among consumers.
4. To understand about people‘s attitude for keeping the money either at
home or at bank.
5. To assess the impact of demonetization on the liquidity position of
Scheduled commercial banks.
6. To evaluate the impact of demonetization on currency in circulation and
GDP ratio.
7. To analyses the impact of demonetization on the financial statements
(balance sheet) of Scheduled commercial banks in India.

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 SCOPE OF THE STUDY

1. To know the impact of Demonetization on middle and low income

group
2. To analyze the reason for Demonetization in the country
3. To know the awareness level of Demonetization among the lower
income group
4. To know the income generation capacity and their spending after
Demonetization
5. Analyze the success of government in promoting cashless economy
6. To give favorable suggestions based on studies

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 NEED OF THE STUDY

1. Overnight, more than 86 percent of currency in circulation has been

transformed into mere Pieces of coloured paper.

2. In view of Government of India‘s decision to scrap Old High

Denomination (OHD) currency on 8th November 2016, the sector is
grappling with a huge drop in collections.

3. On the other hand, MFIs face Repayment default or delayed payment in

view of the limited supply of tenderable currency in our economy this has
led to an increase in loans classified as impaired assets.

4. Small traders, Businessmen, and farmers were the hardest hit due to the
nature of their work, which has also led defaults in the repayment of the
loans.

5. To study the problems faced by the beneficiaries of SHGs in the selected

rural area and urban areas of Telangana during and after the
demonetization period.

6. This Research also focuses on the impact of demonetization on financial

inclusion in India.

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 RESEARCH METHODOLOGY

The research focuses on the secondary sources, as research type descriptive, the
method of data collection second handed:

Primary sources

The primary data is the data which is collected a fresh and for the first time and
thus happen to be original in chapter. Primary data can either through direct
communication with respondent in one form or through personal interviews.

Secondary sources:

The secondary data is the data which have already been collected by someone else
and which have already been passed through the statistical process. Most of the
data used for the study is secondary in nature and collected through the text
books.

1. Secondary data were sourced from various reports, books, periodicals,

journals and websites.
2. This paper is empirical in nature and is regarding post effects of
demonetization. The study tries to look at the extent of demonetization
influence on normal banking operations.
3. Most of the data is collected from internet which is a secondary data that is
from different websites.

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 LIMITATION OF THE STUDY

1. The fore most limitation is that due to present pandemic bankers are not
allowing and we are Restricted to our places
2. Even though PC, Laptops are available 24/7 we are unable spend most of
the time as BLUE RAYS Causes severe eye strain and Headache.
3. Most of the data collected by me is of secondary which may not be 100%
accurate, but I have done my best to keep up the project with available
resources.
4. Due to network issues.
5. Couldn‘t seek any advice from masters who are expertise in this field.

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 INDUSTRIAL PROFILE

ETYMOLOGY

The word bank was taken Middle English from Middle French banque, from
Spanish banca, from Old Italian banca, meaning ―table‖, from Old High German
banc, bank ―bench, counter‖. Benches were used as makeshift desks or exchange
counters during the Renaissance by Florentine bankers, who use to make their
transactions atop desks covered by green tablecloths.

A bank is a financial institution that accepts deposits from the public and creates a
demand deposit while simultaneously making loans. Lending activities can be
directly performed by the bank or indirectly through capital markets.

Due to the importance of banks in the financial stability and the economy of a
country, most jurisdictions Exercise a high degree of regulation over banks. Most
countries have institutionalized a system known as fractional reserve banking,
under which banks hold liquid assets equal to only a portion of their current
Liabilities. In addition to other regulations intended to ensure liquidity, banks are
generally subject To minimum capital requirements based on an international set
of capital standards, the Basel Accords.

Banking in its modern sense evolved in the fourteenth century in the prosperous
cities of Renaissance Italy but in many ways functioned as a continuation of ideas
and concepts of credit and lending that had their roots in the ancient world. In the
history of banking, a number of banking dynasties — notably, The Medicis, the
Fuggers, the Welsers, the Berenbergs, and the Rothschilds — have played a
central role over many centuries. The oldest existing retail bank is Banca Monte
deiPaschi di Siena (founded in 1472), While the oldest existing merchant bank is
Berenberg Bank (founded in 1590).

A bank is also a place where customers can save or borrow money. Banks also
invest money to build up their reserve of money. What they do is regulated by
laws. Those laws differ in different countries. The People who work at a bank are
called bank employees. Certain banks deal directly with the public and they are

12
the only ones which an ordinary person will deal with. Other banks deal with
investments and International currency trading.

Customer‘s money may be placed in the bank for safe keeping. Banks may give
loans to customers under an agreement to pay the money back to the bank at a
later time, with interest. An example is getting a mortgage to buy a house or
apartment. Banks also can use the money they have from deposit Accounts to
invest in businesses in order to make more money.

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In most countries the rules for banks are made by the government acting through
laws. A central Bank (such as the Bank of England) adjusts how much money is
issued at a particular time. This is a factor in the economy of a country, and the
government takes the big decisions. These ―banks of issue‖ take in, and issue out,
coins and banknotes.

HISTORY

ANCIENT INDIA

The Vedas are the earliest Indian texts mention the concept of usury, with the
word kusidin translated as ―usurer‖. The Sutras (700–100 BCE) and the Jatakas
(600–400 BCE) also mention usury. Texts of this period also condemned usury:
Vasishtha forbade Brahmin and Kshatriya varnas from participating in usury. By
the 2nd century CE, usury became more acceptable. The Manusmriti considered
usury an acceptable means of acquiring wealth or leading a livelihood. It also
considered money lending above a certain rate and different ceiling rates for
different castes a grave sin. Later during the Mauryan period (321–185 BCE), an
instrument called adesha was in use, which was an order on a banker directing
him to pay the sum on the note to a third person, which corresponds to the
definition of a modern bill of exchange. The considerable use of these instruments
has been recorded. In large towns, merchants also gave letters of credit to one
another.

MEDIEVAL ERA

The use of loan deeds continued into the Mughal era and was called dastawez.
Two types of loans deeds have been recorded. The dastawez-e-indultalab was
payable on demand and dastawez-e-miadi was payable after a stipulated time. The
use of payment orders by royal treasuries, called barattes, has been also recorded.
There are also records of Indian bankers using issuing bills of exchange on
foreign countries. The evolution of hundis, a type of credit instrument, also
occurred during this period and remains in use.

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COLONIAL ERA

During the period of British rule merchants established the Union Bank of
Calcutta in 1829, first as a private joint stock association, then partnership. Its
proprietors were the owners of the earlier Commercial Bank and the Calcutta
Bank, who by mutual consent created Union Bank to replace these two banks. In
1840 it established an agency at Singapore, and closed the one at Mirzapore that it
had

Opened in the previous year. Also in 1840 the Bank revealed that it had been the
subject of a fraud by the bank‘s accountant. Union Bank Was incorporated in
1845 but failed in 1848, having been insolvent for some time and having used
new money from depositors to pay its dividends.

The Allahabad Bank, established in 1865 and still functioning today, is the oldest
Joint Stock bank in India; it was not the first though. That honor belongs to the
Bank of Upper India, which was established in 1863 and survived until 1913,
when it failed, with some of its assets and liabilities being transferred to the
Alliance Bank of Shimla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. Grind
lays Bank opened its first Branch in Calcutta in 1864.The Comptoir d‘Escompte
de Paris opened a branch in Calcutta in 1860, and Another in Bombay in 1862;
branches followed in Madras and Pondicherry, then a French Possession. HSBC
established itself in Bengal in 1869. Calcutta was the most active trading port in
India, Mainly due to the trade of the British Empire, and so became a banking
center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,
established in 1881 in Faizabad. It failed in 1958. The next was the Punjab
National Bank, established in Lahore in 1894, which has survived to the present
and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a
relative period of stability. Around five decades had elapsed since the Indian

15
rebellion, and the social, industrial and other infrastructure had improved. Indians
had established small banks, most of which served particular ethnic and religious
Communities.

The presidency banks dominated banking in India but there were also some
exchange banks and a number Of Indian joint stock banks. All these banks
operated in different segments of the economy. The exchange Banks, mostly
owned by Europeans, concentrated on financing foreign trade. Indian joint stock
banks were generally undercapitalized and lacked the experience and maturity to
compete with the presidency and Exchange banks. This segmentation let Lord
Curzon to observe, ―In respect of banking it seems we are behind the times. We
are like some old fashioned sailing ship, divided by solid wooden bulkheads into
separate and cumbersome compartments.

The period between 1906 and 1911 saw the establishment of banks inspired by
the Swedish movement. The Swedish movement inspired local businessmen and
political figures to found banks of and for the Indian Community. A number of
banks established then have survived to the present such as Catholic Syrian Bank,
The South Indian Bank, Bank of India, Corporation Bank, Indian Bank, Bank of
Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement led to the establishment of many private
banks in Dakshina Kannada and Udupi district, which were unified earlier and
known by the name South Canara (South Kanara) district. Four nationalized
banks started in this district and also a leading private sector bank. Hence
Undivided Dakshina Kannada district is known as ―Cradle of Indian Banking‖.

The inaugural officeholder was the Britisher Sir Osborne Smith (1 April 1935),
while C. D. Deshmukh (11 August 1943) was the first Indian governor. On
December 12, 2018, Shaktikanta Das, who was the finance Secretary with the
Government of India, begins his journey as the new RBI Governor, taking charge
from Urjit R Patel.

During the First World War (1914–1918) through the end of the Second World
War (1939–1945), and two Years thereafter until the independence of India were
challenging for Indian banking. The years of the First World War were turbulent,
and it took its toll with banks simply collapsing despite the Indian economy

16
gaining indirect boost due to war-related economic activities.

The concept of banking may have begun in ancient Assyria and Babylonia with
merchants offering loans of grain as collateral within a barter system. Lenders in
ancient Greece and during the Roman Empire added two important innovations:
they accepted deposits and changed money. Archaeology from this period in
ancient China and India also shows evidence of money lending.

The present era of banking can be traced to medieval and early Renaissance Italy,
to the rich cities in the centre and north like Florence, Lucca, Siena, Venice and
Genoa. The Bardi and Peruzzi families dominated banking in 14th-century
Florence, establishing branches in many other parts of Europe. Giovanni di Bicci
de‘ Medici set up one of the most famous Italian banks, the Medici Bank, in 1397.
The Republic of Genoa founded the earliest-known state deposit bank, Banco di
San Giorgio (Bank of St. George), in 1407 at Genoa, Italy.

Fractional reserve banking and the issue of banknotes emerged in the 17th and
18th centuries. Merchants started to store their gold with the goldsmiths of
London, who possessed private vaults, and who charged a fee for that service. In
exchange for each deposit of precious metal, the goldsmiths issued receipts
certifying the quantity and purity of the metal they held as a bailee; these receipts
could not be assigned; only the original depositor could collect the stored goods.

Gradually the goldsmiths began to lend the money out on behalf of the depositor,
and promissory notes (which evolved into banknotes) were issued for money
deposited as a loan to the goldsmith. Thus by the 19th century we find ― in
ordinary cases of deposits of money with banking corporations, or bankers, the
transaction amounts to a mere loan or mutuum, and the bank is to restore, not the
same money, but an equivalent sum, whenever it is demanded‖. And ―money,
when paid into a bank, ceases altogether to be the money of the principal (see
Parker v. Marchant, 1 Phillips 360); it is then the money of the banker,

Who is bound to return an equivalent by paying a similar sum to that deposited

with him when he is asked for it?‖ The goldsmith paid interest on deposits. Since
the promissory notes were payable on demand, and the advances (loans) to the
goldsmith‘s customers were repayable over a longer time-period, this was an early
form of fractional reserve banking.

17
The promissory notes developed into an assignable instrument which could
circulate as a safe and convenient form of money backed by the goldsmith‘s
promise to pay, allowing goldsmiths to advance loans with little risk of default.
Thus the goldsmiths of London became the forerunners of banking by creating
new money based on credit.

The Bank of England originated the permanent issue of bank notes in 1695. The
Royal Bank of Scotland established the first overdraft facility in 1728. By the
beginning of the 19th century Lubbock‘s Bank had established a bankers‘ clearing
house in London to allow multiple banks to clear transactions. The Rothschild‘s
pioneered international finance on a large scale, financing the purchase of shares
in the Suez Canal for the British government in 1875.

DEFINITON

The definition of a bank varies from country to country.

Under English common law, a banker is defined as a person who carries on the
business of banking by Conducting current accounts for his customers, paying
cheques drawn on him/her and also Collecting cheques for his/her customers.

In most common law jurisdictions there is a Bills of Exchange Act that codifies
the law in relation To negotiable instruments, including cheques, and this Act
contains a statutory definition of the Term banker: banker includes a body of
persons, whether incorporated or not, who carry on the business of Banking‘.
Although this definition seems circular, it is actually functional, because it ensures
that the legal Basis for bank transactions such as cheques does not depend on how
the bank is structured or regulated. The business of banking is in many common
law countries not defined by statute but by common law, the Definition above. In
other English common law jurisdictions there are statutory definitions of the
business of Banking or banking business. When looking at these definitions it is
important to keep in mind that they are Defining the business of banking for the
purposes of the legislation, and not necessarily in general. In Particular, most of
the definitions are from legislation that has the purpose of regulating and
supervising Banks rather than regulating the actual business of banking. However,

18
in many cases the statutory definition closely mirrors the common law one.
Examples of statutory definitions.
―banking business‖ means the business of receiving money on current or deposit
account, paying and Collecting cheques drawn by or paid in by customers, the
making of advances to customers, and includes Such other business as the
Authority may prescribe for the purposes of this Act.

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct
credit, direct Debit and internet banking, the cheque has lost its primacy in most
banking systems as a payment

Instrument. This has led legal theorists to suggest that the cheque based definition
should be broadened to include financial institutions that conduct current accounts
for customers and enable customers to pay and be paid By third parties, even if
they do not pay and collect cheques.

STANDARD BUSINESS OF BANKS

Banks act as payment agents by conducting checking or current accounts for

customers, paying cheques drawn by customers in the bank, and collecting
cheques deposited to customers‘ current Accounts. Banks also enable customer
payments via other payment methods such as Automated Clearing House (ACH),
Wire transfers or Telegraphic Transfer, EFTPOS, and Automated Teller machines
(ATMs).Banks borrow money by accepting funds deposited on current accounts,
by accepting term deposits, and by Issuing debt securities such as banknotes and
bonds. Banks lend money by making advances to customers On current accounts,
by making installments loans, and by investing in marketable debt securities and
other Forms of money lending.

BANKING IN INDIA

Modern banking in India originated in the last decade of the 18th century. Among
the first banks were the Bank of Hindustan, which was established in 1770 and
liquidated in 1829–32; and the General Bank of India, Established in 1786 but
failed in 1791.

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The largest and the oldest bank which is still in existence is the State Bank of
India (SBI). It originated and started working as the Bank of Calcutta in mid-June
1806. In 1809, it was renamed as the Bank of Bengal. This was one of the three
banks founded by a presidency government; the other two were the Bank of
Bombay in 1840 and the Bank of Madras in 1843. The three banks were merged
in 1921 to form the Imperial Bank of India, which upon India‘s independence,
became the State Bank of India in 1955. For many years, the presidency banks
had acted as quasi-central banks, as did their successors, until the Reserve Bank
of India was established in 1935, under the Reserve Bank of India Act, 1934.

In 1960, the State Banks of India was given control of eight state-associated banks
under the State Bank of India (Subsidiary Banks) Act, 1959. These are now called
its associate banks. In 1969, the Government of India nationalized 14 major
private banks; one of the big banks was Bank of India. In 1980, 6 more private
Banks were nationalized. These nationalized banks are the majority of lenders in
the Indian economy. They dominate the banking sector because of their large size
and widespread networks.

The Indian banking sector is broadly classified into scheduled and non-scheduled
banks. The scheduled Banks are those included under the 2nd Schedule of the
Reserve Bank of India Act, 1934. The scheduled Banks are further classified into:
nationalized banks; State Bank of India and its associates; Regional Rural Banks
(RRBs); foreign banks; and other Indian private sector banks. The SBI has
merged its Associate banks into itself to create the largest Bank in India on 01
April 2017. With this merger SBI has a global ranking of 236 on Fortune 500
index. The term commercial bank refers to both scheduled and non-scheduled
Commercial banks regulated under the Banking Regulation Act, 1949.

Generally the supply, product range and reach of banking in India is fairly
mature-even though reach in rural India and to the poor still remains a challenge.
The government has developed initiatives to address this Through the State Bank
of India expanding its branch network and through the National Bank for
Agriculture and Rural Development (NABARD) with facilities like microfinance.

Banks provide different payment services, and a bank account is considered

20
indispensable by most Businesses and individuals. Non-banks that provide
payment services such as remittance companies are normally not considered as an
adequate substitute for a bank account.

Banks can create new money when they make a loan. New loans throughout the
banking system generate new deposits elsewhere in the system. The money
supply is usually increased by the act of lending, and Reduced when loans are
repaid faster than new ones are generated. In the United Kingdom between 1997
and 2007, there was an increase in the money supply, largely caused by much
more bank lending, which served to push up property prices and increase private
debt. The amount of money in the economy as measured by M4 in the UK went
from £750 billion to £1700 billion between 1997 and 2007, much of the increase
caused by bank lending. If all the banks increase their lending together, then they
can expect new deposits to return to them and the amount of money in the
economy will increase. Excessive or risky lending can cause Borrowers to default,
the banks then become more cautious, so there is less lending and therefore less
money So that the economy can go from boom to bust as happened in the UK and
many other Western economies after 2007.

CHANNELS OF BANKS

Banks offer many different channels to access their banking and other services:

 Branch, in-person banking in a retail location.

 Bank by mail: Most banks accept cheque deposits via mail and use mail
to communicate to their Customers.
 Online banking over the Internet to perform multiple types of transactions.

 Mobile banking is using one‘s mobile phone to conduct banking

transactions.
 Automated Teller Machine banking adjacent to or remote from bank.
 Telephone banking allows customers to conduct transactions over the
telephone with an automated Attendant, or when requested, with a
telephone operator.
 Video banking performs banking transactions or professional banking
consultations via a remote video and audio connection. Video banking can

21
 be performed via purpose built banking transaction machines (similar to an
Automated teller machine) or via a video conference enabled bank branch
clarification
 Relationship manager, mostly for private banking or business banking,
who visits customers at their Homes or businesses
 Direct Selling Agent, who works for the bank based on a contract, whose
main job is to increase the Customer base for the bank

ACTIVITIES UNDER TAKEN BY BANKS

Activities undertaken by banks include personal banking, corporate banking,

investment banking, private Banking, transaction banking, insurance, consumer
finance, trade finance and other related. A bank can generate revenue in a variety
of different ways including interest, transaction fees and financial Advice.
Traditionally, the most significant method is via charging interest on the capital it
lends out to Customers. The bank profits from the difference between the level of
interest it pays for deposits and other Sources of funds, and the level of interest it
charges in its lending activities.

A bank can generate revenue in a variety of different ways including interest,

transaction fees and financial Advice. Traditionally, the most significant method
is via charging interest on the capital it lends out to Customers. The bank profits
from the difference between the level of interest it pays for deposits and other
Sources of funds, and the level of interest it charges in its lending activities.

In the past 20 years, American banks have taken many measures to ensure that
they remain profitable while responding to increasingly changing market
conditions.

Recently, as banks have been faced with pressure from fintechs, new and
additional business models have Been suggested such as freemium, monetization
of data, white-labeling of banking and payment applications, Or the cross-selling
of complementary products.

22
CAPITAL AND RISK

Banks face a number of risks in order to conduct their business, and how well
these risks are managed and understood is a key driver behind profitability, and
how much capital a bank is required to hold. Bank capital consists principally of
equity, retained earnings and subordinated debt.

After the 2007-2009 financial crises, regulators force banks to issue Contingent
convertible Bonds (CoCos).These are hybrid capital securities that absorb losses
in accordance with their contractual Terms when the capital of the issuing bank
falls below a certain level. Then debt is reduced and bank Capitalization gets a
boost. Owing to their capacity to absorb losses, CoCos have the potential to
satisfy Regulatory capital requirement.

Some of the main risks faced by banks include:

• Credit risk: risk of loss arising from a borrower who does not make payments as
promised.

• Liquidity risk: risk that a given security or asset cannot be traded quickly
enough in the market to prevent A loss (or make the required profit).

• Market risk: risk that the value of a portfolio, either an investment portfolio or a
trading portfolio, will Decrease due to the change in value of the market risk
factors.

• Operational risk: risk arising from execution of a company‘s business functions.

• Reputational risk: a type of risk related to the trustworthiness of business.

• Macroeconomic risk: risks related to the aggregate economy the bank is operating
in.

The capital requirement is a bank regulation, which sets a framework within

which a bank or depository Institution must manage its balance sheet. The
categorization of assets and capital is highly standardized so That it can be risk
weighted.

23
BANKS IN THE ECONOMY

Economic functions the economic functions of banks include:

• Issue of money, in the form of banknotes and current accounts subject to cheque
or payment at the Customer‘s order. These claims on banks can act as money
because they are negotiable or repayable On demand, and hence valued at par.
They are effectively transferable by mere delivery, in the case Of banknotes, or by
drawing a cheque that the payee may bank or cash.
• Netting and settlement of payments – banks act as both collection and paying
agents for customers, Participating in interbank clearing and settlement systems to
collect, present, be presented with, and Pay payment instruments. This enables
banks to economize on reserves held for settlement of Payments, since inward and
outward payments offset each other. It also enables the offsetting of Payment
flows between geographical areas, reducing the cost of settlement between them.

• Credit intermediation – banks borrow and lend back-to-back on their own account
as middle men.

• Credit quality improvement – banks lend money to ordinary commercial and

personal borrowers (ordinary credit quality), but are high quality borrowers. The
improvement comes from Diversification of the bank‘s assets and capital which
provides a buffer to absorb losses without Defaulting on its obligations. However,
banknotes and deposits are generally unsecured; if the bank Gets into difficulty
and pledges assets as security, to raise the funding it needs to continue to operate,
this puts the note holders and depositors in an economically subordinated position.

• Asset liability mismatch/Maturity transformation – banks borrow more on

demand debt and short Term debt, but provide more long term loans. In other
words, they borrow short and lend long. With A stronger credit quality than most
other borrowers, banks can do this by aggregating issues (e.g. Accepting deposits
and issuing banknotes) and redemptions (e.g. withdrawals and redemption of
Banknotes), maintaining reserves of cash, investing in marketable securities that
can be readily converted to cash if needed, and raising replacement funding as
needed from various sources (e.g. wholesale cash markets and securities markets).

24
BANK CRISIS

Banks are susceptible to many forms of risk which have triggered occasional
systemic crises. These include liquidity risk (where many depositors may request
withdrawals in excess of available funds), credit risk (the chance that those who
owe money to the bank will not repay it), and interest rate risk (the possibility that
the bank will become unprofitable, if rising interest rates force it to pay relatively
more on its deposits than it receives on its loans).
Banking crises have developed many times throughout history when one or more
risks have emerged for a banking sector as a whole. Prominent examples include
the bank run that occurred during the Great Depression, the U.S. Savings and
Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the
1990s, and the sub-prime mortgage crisis in the 2000s.

SIZE OF GLOBAL BANKING INDUSTRY

Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009
financial year to a record US$96.4 trillion while profits declined by 85% to
US$115 billion. Growth in assets in adverse market conditions was largely a
result of recapitalization. EU banks held the largest share of the total, 56% in
2008/2009, down from 61% in the previous year. Asian banks‘ share increased
from 12% to 14% during the year, while the share of US banks increased from
11% to 13%. Fee revenue generated by global investment banking totalled
US$66.3 billion in 2009, up 12% on the previous year.

The United States has the most banks in the world in terms of institutions (5,330
as of 2015) and possibly branches (81,607 as of 2015). This is an indicator of the
geography and regulatory structure of the US, resulting in a large number of small
to medium-sized institutions in its banking system. As of November 2009,
China‘s top 4 banks have in excess of 67,000 branches (ICBC: 18000+, BOC:
12000+, CCB: 13000+, ABC: 24000+) with an additional 140 smaller banks with
an undetermined number of branches. Japan had 129 banks and 12,000 branches.
In 2004, Germany, France, and Italy each had more than 30,000 branches – more
than double the 15,000 branches in the UK.

25
REGULATION

Currently, commercial banks are regulated in most jurisdictions by government

entities and require a special bank license to operate. Usually, the definition of the
business of banking for the purposes of regulation is extended to include
acceptance of deposits, even if they are not repayable to the customer‘s order –
although money lending, by itself, is generally not included in the definition.

Unlike most other regulated industries, the regulator is typically also a participant
in the market, being either a publicly or privately governed central bank. Central
banks also typically have a monopoly on the business of issuing banknotes.
However, in some countries this is not the case.
In the UK, for example, the Financial Services Authority licenses banks, and
some commercial banks (such as the Bank of Scotland) issue their own banknotes
in addition to those issued by the Bank of England, the UK government‘s central
bank.

Banking law is based on a contractual analysis of the relationship between the

bank (defined above) and the customer – defined as any entity for which the bank
agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

• The bank account balance is the financial position between the bank and the
customer: when the account is in credit, the bank owes the balance to the
customer; when the account is overdrawn, the customer owes the balance to the
bank.

• The bank agrees to pay the customer‘s checks up to the amount standing to the
credit of the customer‘s account, plus any agreed overdraft limit.

• The bank may not pay from the customer‘s account without a mandate from the
customer, e.g. a cheque drawn by the customer.

• The bank agrees to promptly collect the cheques deposited to the customer‘s
account as the customer‘s agent, and to credit the proceeds to the customer‘s

26
account.

• And, the bank has a right to combine the customer‘s accounts, since each
account is just an aspect of the same credit relationship.

• The bank has a lien on cheques deposited to the customer‘s account, to the
extent that the customer is indebted to the bank.

• The bank must not disclose details of transactions through the customer‘s
account – unless the customer consents, there is a public duty to disclose, the
bank‘s interests require it, or the law demands it.

• The bank must not close a customer‘s account without reasonable notice, since
cheques are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between

the customer and the bank. The statutes and regulations in force within a
particular jurisdiction may also modify the above terms and/or create new rights,
obligations or limitations relevant to the bank-customer relationship. Some types
of financial institution, such as building societies and credit unions, may be partly
or wholly exempt from bank license requirements, and therefore regulated under
separate rules.

The requirements for the issue of a bank license vary between jurisdictions but
typically include:

• Minimum capital.

• Minimum capital ratio.

• ‗Fit and Proper‘ requirements for the bank‘s controllers, owners, directors, or
senior officers.

• Approval of the bank‘s business plan as being sufficiently prudent and plausible.

DIFFERENT TYPES OF BANKING

Banks‘ activities can be divided into:

• Retail banking, dealing directly with individuals and small businesses;

27
• Business banking, providing services to mid-market business;

• Corporate banking, directed at large business entities;

• Private banking, providing wealth management services to high-net-worth

individuals and families;

• Investment banking, relating to activities on the financial markets.

Most banks are profit-making, private enterprises. However, some are owned by
government, or are non- Profit organizations.

TYPES OF BANKS

• Commercial banks: the term used for a normal bank to distinguish it from an
investment bank. After The Great Depression, the U.S. Congress required that
banks only engage in banking activities, whereas Investment banks were limited
to capital market activities. Since the two no longer have to be under Separate
ownership, some use the term ―commercial bank‖ to refer to a bank or a division
of a bank that mostly deals with deposits and loans from corporations or large
businesses.

• Community banks: locally operated financial institutions that empower

employees to make local Decisions to serve their customers and the partners.

• Community development banks: regulated banks that provide financial services

and credit to under-Served markets or populations.

• Land development banks: The special banks providing long-term loans are
called land development Banks (LDB). The history of LDB is quite old. The
first LDB was started at Jhang in Punjab in 1920.The main
Objectives of the LDBs are to promote the development of land, agriculture and
increase the Agricultural production. The LDBs provide long-term finance to
members directly through their Branches.

• Credit unions or co-operative banks: not-for-profit cooperatives owned by the

depositors and often Offering rates more favorable than for-profit banks.
Typically, membership is restricted to employees of A particular company,

28
residents of a defined area, members of a certain union or religious organizations,
And their immediate families.

• Postal savings banks: savings banks associated with national postal systems.

• Private Banks: banks that manage the assets of high-net-worth individuals.

Historically a minimum of US$1 million was required to open an account;
however, over the last years many private banks have lowered their entry hurdles
to US$350,000 for private investors.

• Offshore banks: banks located in jurisdictions with low taxation and regulation.
Many offshore banks are essentially private banks.

• Savings bank: in Europe, savings banks took their roots in the 19th or sometimes
even in the 18th Century. Their original objective was to provide easily accessible
savings products to all strata of the Population. In some countries, savings banks
were created on public initiative; in others, socially committed individuals created
foundations to put in place the necessary infrastructure. Nowadays, European
savings banks have kept their focus on retail banking: payments, savings
products, credits and Insurances for individuals or small and medium-sized
enterprises. Apart from this retail focus, they also Differ from commercial banks
by their broadly decentralized distribution network, providing local and Regional
outreach – and by their socially responsible approach to business and society.

• Building societies and Landesbanks: institutions that conduct retail banking.

• Ethical banks: banks that prioritize the transparency of all operations and make
only what they consider to be socially responsible investments.

• A direct or internet-only bank is a banking operation without any physical bank

branches. Transactions are usually accomplished using ATMs and electronic
transfers and direct deposits through an online Interface.

TYPES OF INVESTMENT BANKS

• Investment banks ―underwrite‖ (guarantee the sale of) stock and bond issues,
trade for their own Accounts, make markets, provide investment management,
and advise corporations on capital Market activities such as mergers and

29
acquisitions.
• Merchant banks were traditionally banks which engaged in trade finance. The
modern definition, however, refers to banks which provide capital to firms in the
form of shares rather than loans. Unlike venture caps, they tend not to invest in
new companies.

COMBINATION OF BANKS

• Universal banks, more commonly known as financial services companies,

engage in several of these Activities. These big banks are very diversified groups
that, among other services, also distribute Insurance – hence the term
bancassurance, a portmanteau word combining ―banque or bank‖ and
―assurance‖, signifying that both banking and insurance are provided by the same
corporate entity.

TYPES OF BANKS

• Central banks are normally government-owned and charged with quasi-

regulatory responsibilities, Such as supervising commercial banks, or controlling
the cash interest rate. They generally provide Liquidity to the banking system and
act as the lender of last resort in event of a crisis.

• Islamic banks adhere to the concepts of Islamic law. This form of banking
revolves around several Well- established principles based on Islamic laws. All
banking activities must avoid interest, a concept that is forbidden in Islam. Instead,
the bank earns profit (markup) and fees on the financing facilities that it extends
to customers.

TYPES OF ACCOUNTS

Bank statements are accounting records produced by banks under the various
accounting standards of the World. Under GAAP there are two kinds of accounts:
debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit

30
Accounts are Assets and Expenses. The bank credits a credit account to increase
its Balance, and debits a credit account to decrease its balance. The customer
debits his or her savings/bank (asset) account in his ledger when making a deposit
(and the Account is normally in debit), while the customer credits a credit card
(liability) account in his ledger every Time he spends money (and the account is
normally in credit). When the customer reads his bank statement, The statement
will show a credit to the account for deposits, and debits for withdrawals of funds.
The Customer with a positive balance will see this balance reflected as a credit
balance on the bank statement. If the customer is overdrawn, he will have a
negative balance, reflected as a debit balance on the bank Statement.

BROKERED DEPOSITS

One source of deposits for banks is brokers who deposit large sums of money on
behalf of investors through Trust corporations. This money will generally go to
the banks which offer the most favorable terms, often better than those offered
local depositors. It is possible for a bank to engage in business with No local
deposits at all, all funds being brokered deposits. Accepting a significant quantity
of such deposits, Or ―hot money‖ as it is sometimes called, puts a bank in a
difficult and sometimes risky position, as the funds Must be lent or invested in a
way that yields a return sufficient to pay the high interest being paid on the
Brokered deposits. This may result in risky decisions and even in eventual failure
of the bank. Banks which Failed during 2008 and 2009 in the United States during
the global financial crisis had, on average, four times More brokered deposits as a
percent of their deposits than the average bank. Such deposits, combined with
Risky real estate investments, factored into the savings and loan crisis of the
1980s. Regulation of brokered Deposits is opposed by banks on the grounds that
the practice can be a source of external funding to growing Communities with
insufficient local deposits. There are different types of accounts: saving, recurring
and Current accounts.

31
 THEORETICAL FRAMEWORK

Banks are the back bone of this entire process and also the biggest beneficiaries.
Post complete Exchange of currencies, banks should benefit from higher deposits
and transaction volumes, Lower cash handling costs and greater acceptance of
digital channels. There are likely to be Secondary benefits for the insurance,
asset/wealth management companies through higher financial savings. While the
Nifty closed 1.31% down, Bank Nifty closed higher by 0.09% giving a
confirmation of the same. With demonetization, more people are depositing
money into the banks. This means the banks have more liquid funds and more
money to lend. Many banks have also slashed their deposit rates including SBI,
ICICI Bank, HDFC Bank.

1. Canara Bank, ICICI Bank and HDFC Bank have cut their fixed deposit
rates by up to 1%. State Bank of India cut their fixed deposit interest rates
by 0.15% on select maturities.
2. HDFC Bank and ICICI Bank have cut their deposit by up to 0.25%.
3. United Bank of India has slashed their rates by 1% only on the short-term
deposits

In the banking world, when deposit rates are cut, it generally means the lending
rates will also Be slashed down. Since banks are paying lower deposit rates to
customers, this allows them Room to charge lesser on loans. Once interest rates
come down, this would translate into a lower EMI. The timeframe for loan rates
to come down could take anywhere between 3 months and 6 months.

32
 DEMONETIZATION AND BANK
OPERATIONS

Demonetization has brought plethora of challenges in additions to the challenges

which are already facing by banks. The influences were short-term and long-term
views. In short-term, it disrupted the banks and stressed strongly to carry out bank
operations and in long run it helped the banks to pool the deposits without
incurring of any cost. Here are four influences of demonetization on Banks.

1. Increase in Deposits - Demonetization has increased the deposits in

Banks. Unaccounted money in the Form of Rs.500 and Rs.1000 were
flowing to the Banks and the sizes of deposits have been increased. It
helped the banks to grab the deposits and increase their deposits.
2. Fall in cost of Funds - Over the past few months, the deposits are
increased. It led the banks to keep a Major part of deposits in the form of
cash deposits. PSU Banks have a lion share (over 70%) of the Deposits
and biggest gainers of the rise in deposits, leading to lower cost of funds.
3. Demand for Government Bonds - After sharp rise in deposits on post
Demonetization, banks started lending such surplus deposits to the RBI
under the reverse repo options. PSU Banks, particularly, deployed excess
funds in government bonds. The return on bond investment is likely to add
15 to 20 Per cent increase in the earnings of banks.
4. Sagginess in Lending - lending growth of the banks is considerably less
even after demonetization and Its impact of growth in the amount of
public deposit. Banks have tried to lend the money to the needy Group by
reducing their interest rates, but it shrunk over the last few months
5. Results of Post Demonetization on Bank Operations - There are positive
and negative results of Post Demonetization on Bank operations. Both
have Influenced Banks‘ liquidity and profitability and employees too. The
following are positive results of Demonetization.
6. Free flow of deposits - Banks has gained deposits substantially after
demonetization which they can invest for improving their liquidity and
profitability.

33
7. Improved digital Interface - Improvement in digital tools and equipment to
execute bank transactions has avoided cash loss for various reasons like
theft, dacoits and misappropriations.
8. People‘s surplus at Bank - Cash is an idle asset which does not yield any
income unless kept in a bank. So, Demonetization made the people to keep
their surplus money in a bank to earn some sort of income.
9. Increased number of Customers - Demonetization has influenced public to
come and execute Transactions with banks. It made even a non-income
group people to visit bank and have an account. It Increased number of
account holders in banks while increasing deposit corpus. Similarly,
Demonetization has brought some operational issues to Banks. It disturbed
Banks ‗Employees, Operational Costs and Profitability. The following are
negative influences of Demonetization.
10. Cash Reserve Requirement - 100% CRR on incremental deposits meant
that banks did not earn any Interest on Rs. 3 Lakh crore of deposits for
nearly a fortnight.

11. Waived off ATM Charges - ATM charges were waived off during banned
note exchange fortnight Incurred a loss of Rs. 20 in every transaction.
12. Waived off Merchant Discount Rate - Banks incurred loss of 1% discount
charges from merchants on Using of every card transaction.
13. Reduced SMEs‘s Sale and influence on NPAs - During Demonetization,
some SME businesses had seen their sales drop by 50-80 percent and
could default in their installments to banks. This led the Banks to consider
it as NPA and affected its level in banks.
14. Stress on Employees - Bank Employees was put under pressure and
overtime work environment. It depressed them and kept imbalanced life
style. Few cases were found where the employees committed Suicide due
to work pressure.

34
 IMPACT OF DEMONETIZATION ON BALANCE
SHEET OF BANKS
1. Decline in currency in circulation on account of Demonetization led to a
surge in bank deposits.
2. Total currency in circulation declined by about ₹ 8,800 billion (₹8.8 lac
crores). This, in turn, was largely reflected in sharp increase of about ₹ 6,720
billion (₹ 6.72 lac Crores) in aggregate deposits of the banking system even
after outflows in NRI Deposits during the period.
3. Between end-December 2016 and early March 2017, there was a net
increase in Currency in circulation by about ₹ 2,600 billion. During this
period, deposits with Banks also declined moderately.
4. As per data for October 28, 2016 (prior to Demonetization) and February
17, 2017 (latest available), aggregate deposits of SCBs increased by ₹
5,549 billion during the Period.
5. Bulk of the deposits so mobilized by SCBs has been deployed in: (i)
reverse repos of various tenors with the RBI; and (ii) cash management
bills (CMBs) issued under the Market Stabilization Scheme (which is a
part of investment in government securities in the balance sheet of banks).
6. Loans and advances extended by banks increased by ₹ 1,008 billion. The
incremental Credit deposit ratio for the period was only 18.2 per cent.
7. Additional deposits mobilized by commercial banks have been largely
deployed in Liquid assets. This may be due to the expected transitory
nature of the bulk of such Deposits and weak demand as reflected in the
subdued growth of credit.

35
 IMPACT OF DEMONETIZATION ON
PROFITABILITY OF BANKS
1. Banks‘ net profits essentially reflect the difference between interest earned
on loans and advances and investments, and interest paid on deposits and
borrowings, adjusted for operating costs and provisions.
2. Loans and advances and investments, which are the main sources of
interest income, together constitute more than 85 per cent (61 per cent
accounted for by loans and Advances and 25 per cent by investments).
3. The sharp increase of 4.1 percentage points in the share of CASA deposits
in Aggregate deposits to
39.3 per cent (up to February 17, 2017) resulted in a reduction in the cost of
aggregate deposits.
4. Banks have also lowered their term deposit rates; the median term deposit
rate Declined by 38 bps during November 2016-February 2017.
5. The decline in the cost of funding resulted in decline in the 1-year median
marginal Cost of funds based lending rate (MCLR) by as much as 70 bps
post-Demonetization (November 2016-February 2017).
6. Banks earned return of around 6.23-6.33 per cent under reverse repos and
market Stabilization scheme (MSS) as against the cost of CASA deposits
of around 3.2 per Cent.
7. Accordingly, for an average deployment of about ₹ 6 trillion in a quarter
under Reverse repos and MSS securities, banks‘ net interest income from
increased deposits Is estimated at about ₹ 45 billion in a quarter after
Demonetization.
8. Banks continue to enjoy the increased share of low cost CASA deposits,
although it is gradually declining with the increase in currency in
circulation.
9. The increase in net interest income would need to be adjusted for the cost
of Managing withdrawal of SBNs and injection of new bank notes (such
as calibration of ATM machines, staff overtime, security arrangements,
lower fees/waiver of fees on Digital modes of payments), the exact details
of which are not available at this stage.

36
 RESULTS OF POST DEMONETIZATION ON BANK
OPERATIONS
There are positive and negative results of Post Demonetization on Bank
operations. Both have influenced Banks‟ liquidity and profitability and
employees too. The Following are positive results of demonetization.

1. Free flow of deposits - Banks has gained deposits substantially after

demonetization which they can invest for improving their liquidity and
profitability.
2. Improved digital Interface - Improvement in digital Tools and
equipment to execute bank transactions has avoided cash loss for
various reasons like theft, Dacoits and misappropriations.
3. People‘s surplus at Bank - cash is an idle asset which does not yield any
income unless kept in a bank. So, Demonetization made the people to
keep their surplus Money in a bank to earn some sort of income.
4. Increased number of Customers - Demonetization has Influenced public to
come and execute transactions with banks. It made even a non-income
group people to visit bank and have an account. It increased number of
account holders in banks while increasing deposit Corpus.

Similarly, Demonetization has brought some operational Issues to Banks. It

disturbed Bank‘s Employees, Operational Costs and Profitability. The
following are Negative influences of Demonetization.

1. Cash Reserve Requirement - 100% CRR on Incremental deposits meant

that banks did not earn Any interest on Rs. 3 Lakh crore of deposits for
nearly a fortnight.
2. Waived off ATM Charges - ATM charges were waived off during banned
note exchange and banks incurred a Loss of Rs. 20 in every transaction.
3. Waived off Merchant Discount Rate - Banks incurred Loss of 1%
discount charges from merchants on using of every card transaction.
4. Non Selling of Loans - Banks were focused on Exchanging currency
notes and they were not able to Sell any loan products. This made banks
to curb their Lending activities.
5. Reduced SME‟s Sale and influence on NPAs - During Demonetization,

37
 some SME businesses had seen their Sales drop by 50-80 percent and
could default in their Installments to banks. This led the banks to
consider it As NPA and affected its level in banks.
6. Stress on Employees - Bank Employees was put under Pressure and
overtime work environment. It depressed them and kept imbalanced life
style. Few cases were Found where the employees committed suicide due
to Work pressure

NON-BANKING FINANCIAL
INTERMEDIARIES
Demonetization has impacted various financial intermediaries differently. As
explained earlier, consolidated balance sheet of SCBs has expanded byabout₹6.7
trillion in the post-demonetization period. Debt oriented mutual funds and
insurance companies have also gained. On-banking Financial Companies
(NBFCs) and Micro Finance Institutions (MFIs) were adversely affected, both in
terms of disbursals and collection of dues. However, the situation with regard to
most NBFCs has started to improve from late December 2016.

PRADHAN MANTRI JAN-DHAN

YOJANA ACCOUNTS
Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial
Inclusion to ensure access to financial services, namely, Banking/ Savings
&Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable
manner. Account can be opened in any bank branch or Business Correspondent
(Bank Mitra) outlet.

After demonetization, 23.3 million new accounts were opened under the Pradhan
Mantri Jan-Dhan Yojana (PMJDY), proportion of which 80% were with public
sector banks. 53.6% of the new Jan Dhan accounts opened, were in urban areas
and 46.4% in rural areas.

The amount of deposits under PMJDY accounts increased significantly post

demonetization. On 9Th November, 2016 the total balance in PMJDY

38
accountswas₹456 billion which peaked at₹ 746 billion as on December 7, 2016
i.e. an increase of 63.6% in the total balance of accounts in almost less than a
month.

Moreover, there were reports regarding the use of these accounts to convert black
money i.e., unaccounted money or illegal money into white, the government and
authorities have issued warrant against such accounts which were misused. In
order to check the misuse of Jan Dhan accounts by black money hoarders
following the demonetization, the Reserve Bank of India has restricted the
withdrawal from such accounts to₹10,000 per month. However, Branch managers
were allowed further withdrawals beyond₹10,000amonth within the current
applicable limits only after ascertaining the genuineness of such withdrawals and
duly documenting the same on bank‘s record.

39
 DIGITAL MODES OF PAYMENT
An aftereffect of demonetization was that the digital modes of payments picked up
sharply. After demonetization, there has been a significant emphasis on digital
modes of payment.

DIGITAL AND CASHLESS BANKING FACILITY

The Government of India and the Reserve Bank of India have initiated a series of
measures, some of which are temporary, to promote movement from cash to non-
cash modes of transactions which are as follows

(i) Reduction in the merchant discount rate (MDR) and point of

sale(POS) fees
(ii) Monetary incentives in the form of discounts and prizes
(iii) Service tax relief on MDR for small transactions
(iv) Waiver of charges for small value transactions under
Immediate Payment Service (IMPS), Unified Payment
Interface (UPI) and Unstructured Supplementary Service Data
(USSD) based *99#platform
(v) Broadening Prepaid Payment Instrument (PPI) reach by
enhancement of limits
(vi) Introduction of a new category of PPIs
(vii) Permitting banks to issue PPIs to a larger set of entities; and
(viii) Permitting National Payments Corporation of India (NPCI) to
launch
(a) the common app for UPI; and
(b) National Electronic Toll Collection (NETC) system.

The government also announced that it would ensure that transactions fee/MDR
charges associated with payment through digital means shall not be passed on to
consumers. These measures are encouraging migration of consumers from cash to
digital modes of payments.

After the announcement of demonetization, digital activity levels were low in the
initial weeks as people were busy depositing/exchanging SBNs. However, in

40
December 2016, digital payment activity increased alongside progressive
demonetization. The usage statistics show that growth for major modes of
electronic payments was good in October 2016, mainly on account of festive
Season. The continuance of that high growth with a further pick up in some
components from November to January 2017 (Table 4) was positive fallout of
demonetization. However, the pace of growth moderated somewhat in February
2017.

41
 GLOSSARY

1. National electronic funds transfer (NEFT) - Is a nation-wide payment

system facilitating one-to-one funds transfer. Under this Scheme,
individuals, firms and corporates can electronically transfer funds from
many bank branch to any individual, firm or corporate having an account
with any other bank branch in the country participating in the Scheme.
Under NEFT, the transactions are processed and settled in batches. There
is no limit – Either minimum or maximum – On the amount of funds that
could be transferred using NEFT.
2. Immediate Payment Service (IMPS) - Offers an instant, 24X7, interbank
electronic fund transfer service through mobile phones. IMPS transfers
money instantly within banks across India through mobile, internet and
ATMs.
3. Cheque Truncation System (CTS) - Is the process that obviates the need to
move the physical instruments across bank branches. This reduces the time
required for their collection and brings elegance to the entire activity of
cheque processing.
4. National Automated Clearing House (NACH) - Implemented by NPCI is a
web based solution for making bulk transactions towards Distribution of
subsidies, dividends, interest, salary, pension etc. And also for bulk
transactions towards collection of payments pertaining to telephone,
electricity, water, loans, investments in mutual funds, insurance premium
etc.
5. Unified Payments Interface (UPI) - Is a system that, through a universal
application for transaction, connects multiple bank accounts into a single
mobile application (of any participating bank) for immediate money
transfer through mobile device round the clock 24x7and 365 days. It uses
a single mobile application for accessing different bank accounts. Recently
NPCI has launched a front-end app called BHIM that can be downloaded
on mobiles to use UPI for fund transfer.
6. Unstructured Supplementary Service Data (USSD) - Service of NPCI
caters to the need for immediate low value remittances. The USSD service
brings together diverse ecosystem partners such as banks &telecom

42
service providers and allows customers to access financial services by
dialing *99# from their mobile registered with the bank. The service
works across all GSM service providers all types of handsets Smart
phones and feature phones.

43
 HUMAN TRAFFICKING

Yes, industry of the human trafficking which is India‘s One of the most
horrendous mafia working and kidnapping innocent little girls, women and use
them as sex workers has been come to a grinding halt. Recently, the rescue
workers on the ground revealed this information. According to the study, until
November the girls are kidnapped from all over the country every year, and are
transported to different places both nationally and internationally using
middleman. The trafficked persons are sold to brothels, placement agencies and as
child brides. Many times, people who indulge in black magic also buy them
through dealers.

But ever since the demonetization was declared on November 8th, the rescue
workers have said that the trafficking has been stopped completely and not a
single girl has been trafficked!!The rescue workers told that they had never seen
the human trafficking business shut off from root any time before.

All the selling and buying transactions of human trafficking used to happen
through cash and now the operators and mafia heads do not have money to pay to
the middleman. These people mostly used 500 and 1000 rupee notes as it was
easy, but now there is no cash liquidity that has badly hit the business.

Nobel Prize winner Kailash Satyarthi said, ―After demonetization, the brothel
owners have literally lost their business since they cannot exchange money in
banks and new currency is not readily available in the markets yet. So the
customers have stopped going to brothels and brothel owners since they have no
cash to pay them‖. He also added to his statement that his team met the Prime
Minister appraised him about the development and suggested to take Further steps
to ensure that black money doesn‘t get accumulated in the System again.

44
 HAWALA TRADING
Demonetization has impacted an unprecedented hit on the hawala trading. After
demonetization, Hawala operators in India, Pakistan & Dubai say that only 3-5%
of the trade is functioning.

According to the media reports during the initial period of demonetization, Delhi
a hub of money laundering & the agents in the city were tremendously affected.
Many of them had even closed shops as both customers &cash were negligible
following the 8th of November.Gujarati hawala traders working in the capital city
of the country were mostly affected& then run the risk of going bankrupt. Their
usual custom was to shutdown offices for Diwali & go back to Gujarat for 15-20
days. But after 8Th of November, these traders haven‘t even returned back to
Delhi.

The cash that was kept by these people in great volume has become useless after
the announcement of demonetization. Such channels of money laundering are the
lifesaving rope of drug dealers, terrorists& other criminals. With just 3-5% of the
trade still intact, it is but obvious that terrorism & other mafia activities have
suffered a huge blow. According to reports of investigation agencies these
hawala and money laundering networks are attempting to restore their business
by parking new currency in neighboring countries. But the officials are tightening
the screws especially near Bangladesh & ensuring that this is kept to a bare
minimum.

TRANSPORTATION HALTS
India‘s apex transporters body, All India Motor Transport Congress
(AIMTC)Claiming to have 93 lakhs truckers, 50 lakhs buses and tourist taxis and
cab Operators under the demonetization‘s bend.

―Our about 4 lakh trucks are stranded across India with about 8 lakh driver sand
conductors have been severely impacted due to demonetizing the₹500and₹1,000
notes. The sudden ban on higher denomination notes have made them stand in
long queues before banks in different parts. The withdrawal limits minuscule with

45
ATMs at many places not working and paralyzing the transport business,‖ said
AIMTC president BhimWadhwa demanding speedy increase in cash withdrawal
limits.

46
 RAILWAY TICKET BOOKINGS
As of November 2016, Indian Railways did not have the option to make payment
with cards at the counters. After the demonetization move, the government
announced to make card payment options available at railway counters in the
country.

In a statement from the Railway Ministry states, ―With a view to facilitate

convenient booking of reserved and unreserved tickets by passengers through
cashless modes of payment at the ticket booking counters, it has been decided to
install 10,000 POS (Point of Sale) (Swipe)machines at the PRS (Passenger
Reservation System) and UTS counters(including Suburban stations).‖

Railways have more than 13,000 ticket booking counters across the country. In
the long term, their plan is to equip all its ticket counters with POSmachines. It is
also planning to accept payments through mobile wallets. But as the Indian
Railways on Monday said it will accept old demonetized bank notes of₹500
and₹1,000, for buying tickets and for on board catering till24 November. Indian
Railways authorities observed that a large number of people started booking
tickets particularly in 1A and 2A classes for the longest distance possible, to get
rid of unaccounted cash. A senior railways official reportedly said that 4.27 crore
passengers were nationally booked across all classes. Out of these, the number of
passengers booked, when 27,237 passengers had booked tickets in 1A and 69,950
in 2Aon 9Th November.‖ After a very short time, The Railways Ministry and the
Railway Board responded and decided that ticket cancellation and refund of
tickets of value₹10,000 and above will not be allowed to given in cash by any
means. The payment can only be through cheque/electronic payment. Tickets
above₹10,000 can be refunded by filing ticket deposit receipt only on surrendering
the original ticket. For any cash transaction above₹50,000 a copy of the PAN card
must be submitted

47
 E-COMMERCE BUSINESS
With the ban on₹500 and₹1,000 currency notes, e-commerce players were forced
to stop ―cash-on-Delivery ―Payment modes on their site. Certain e-commerce
players like Flipkart and Snap deal made restrictions on the order purchase value
to below₹1,000. While Amazon India stopped Cash-on-Delivery orders, a day
after the big announcement. These e-commerce companies also stopped receiving
old denomination notes of₹500 and₹1,000and paid more emphasis on other means
of digital payments. The Demonetization move has hurt the e-commerce
conversions of various companies from Flipkart to Zomato, which is a food
discovery and delivery portal with other companies that mainly generate revenues
through hard cash that accounts for around 60-70% of total orders. With fall in
COD orders, demonetization has led to jump in digital payment options for
making online transactions. As per a research done by the Forrester Research,

―The cash on delivery share will come down and it will force customers to make
payments online. Initially, in the next 1-2 months it may hurt e-commerce
Companies.‖

Demonetization has given a boost to digital payments and is encouraging people

to shop online more. This will definitely provide an opportunity for ecommerce
players to push customers towards adopting cashless instruments and recalibrate
business models to incentivize cashless instruments.

REAL ESTATE SECTOR

In the context of Real estate sector demonetization was found to be a short-term
restless situation, particularly for land deals, commercial transactions, hospitality
or retail. Small builders and those in specific cities/ micro markets where cash
dealing was more prevalent will be most impacted. Registration prices in
residential space also gone up to adjust for cash component. Therefore, resale of
property impacted more than primary sales. Organized real estate sector also faced
demand slowdown for a short while, largely due to ‗wait and watch‘ susceptibility

48
of buyers and investors.

49
 MUNICIPAL & LOCAL TAX
PAYMENT
After demonetization, Government of India allowed the use of demonetized notes
of₹500 and₹1,000 for the payment of municipal and local body taxes, it led to
people using demonetized currency notes to pay large amount of outstanding and
advance taxes. In the return, the collection of revenue from taxes of civic bodies
increased tremendously.

As per media reports, Municipal tax collection in Gujarat has risen almost six-fold
in just three working days after 8thNovember, all thanks to the demonetization of
high value currency notes. The Gujarat Municipal Finance Board (GMFB) said
that municipal bodies of whole Gujarat collected₹171crore in those three days.
Ahmedabad Municipal Corporation (AMC) collected₹54.5 crore tax those of
Surat collected₹43.8 crore, Rajkot and Vadodara got₹13 crore and₹ 5.4crore,
respectively.

The revenue generation by tax collection by local bodies have surged over260%
and more than₹15000 crore collected after 14 days of demonetization. According
to Finance Minister Arun Jaitley, the total indirect tax collection rose to 14.2%
only in the month of December.

FAKE CURRENCY
The impact on the fake currency would be more significant. Many dealers with
the existing counterfeit notes would be trapped, as they would have to take the
notes to the bank and have better chances of getting their racket exposed. Thus,
they have only option to destroy their notes and incur losses.

A study done by National Investigation Agency (NIA) and India Statistical

Institute in2016 estimated that fake Indian currency notes in circulation have a
face value of Rs 400 crore. This works out to 0.022% of the currency which was
demonetized. Countries which face the issue of fake currency resort to phased
replacement of old series of notes with new notes that have better security
features. Worldwide demonetization is generally not used as a tool to deal with

50
counterfeiting.

51
 PRADHAN MANTRI GARIB
KALYAN YOJANA
Pradhan Mantri Garib Kalyan Yojana, 2016 (PMGKY) is a pardoning scheme
launched by the PM Modi led Government of India in December 2016 on the
lines of the Income declaration scheme, 2016 (IDS) launched earlier in the year.
A part of the Taxation Laws (Second Amendment) Act, 2016, the scheme
provides an opportunity to declare unaccounted wealth and black money in a
confidential manner and avoid prosecution after paying a fine of50% on the
undisclosed income. An additional 25% of the undisclosed income is invested in
the scheme, which can be refunded after four years, without any interest.

Valid from 16Th December, 2016 to 31St March, 2017, the scheme can only be
availed to declare income in the form of cash including old demonetized
banknotes of₹500 and₹1,000 or bank deposits in Indian bank accounts and not in
the form of jewellery, stock, immovable property, or deposits in overseas
accounts.

52
 DATA ANALYSIS AND
INTERPRETATION

1. Do you think that Demonetization helped reduce Black money, corruption

and terrorism in India?

Through the responses from this question we can interpret that the responses for
two options i.e. somewhat and yes have equal percentage of answers which means
that people believe that Demonetization has helped reduce black Money,
corruption and terrorism to some extent. This Move is helpful because it has
helped reduce black money, Corruption and terror funding in India to some extent.
It also helped in making India a digital economy by reducing The usage of cash.

53
Usage of plastic cards has also increased to some extent. This move has not been
more helpful because the Black money holders, tax evaders and corrupt Officials
may not necessarily keep their money in bags at Home as it was the old concept
now they invest this money In the market. Hence it can be said that this move by
the Government has not produced desired results and has cause Inconvenience to
common man.

54
 2. Did you mind the inconvenience faced through Demonetization?

Through the responses from this question we can interpret that the people do
believe that demonetization has caused Inconvenience to them. People were
forced to stand in long Queues for hours and even days. Out of all the people
Affected through demonetization bank employees are the Most stressed due to
the increase

in their workload, if it Could be measured we could see alarming level of stress in

The bank employees all over India because they have to Serve a relentless horde
of panicked customers, bank Employees are facing what is probably the most

55
Challenging period of crisis in their careers. Due to Demonetization the bank
employees were made to work throughout the day, missing their lunch breaks.
They even worked throughout the nights. They were stressed a lot and some of
them even suffered serious health problems.

56
 3. What is the impact of Demonetization on the use of online banking?

Through this question we can understand that the use of online banking has
increased after demonetization. In India people were mostly dependent on cash
transactions but after demonetization when the supply of money was less people
are resorting to the use of online banking and online payments to meet their daily
expenses. Thus we can say that the use of online banking has increased after
demonetization.

57
 4. What is the impact of Demonetization on the use of plastic cards?

Through the responses of this question we can interpret that all of the people
believe that demonetization has increased the use of plastic cards. Due to the
decrease in the supply of cash because of demonetization most of the people have
resorted to the use of online banking, plastic cards, mobile banking, etc.

58
 5. What is the Impact of demonetization on the functioning of ATM?

Through the responses of this question we can clearly see that the functioning of
ATM has increased after demonetization. After demonetization the government
has imposed a limit to the withdrawal of cash because of which the customers are
visiting the ATM n number of Times to withdraw the cash so as to meet their cash
requirement.

59
 6. Do you think Demonetization is having a positive Impact over banking
sector?

Through the responses of this question we can clearly see that those bank
employees who have filled this questionnaire do believe that there is an impact of
Demonetization on the banking sector. The result shows that frequency of usage
of internet banking services is Higher After demonetization than before
demonetization.

60
 FINDINGS

This research was conducted to find the ―IMPACT OF DEMONETIZATION ON

THE BANKING SECTOR‖, at the end of this research we can say that
Demonetization does have An impact on the banking sector. Through this study
we got an Idea about the views of bank Employees towards Demonetization.
After completing this study we can say that:

 Demonetization helped reduce black money, corruption and terrorism in

India because there are equal responses for the two options i.e. somewhat
and yes.
 People mind the inconvenience faced through demonetization as maximum
number of people have opted for the option yes.
 Demonetization has not at all helped the bank employees.
 There was an impact of demonetization on the workload of Bank
Employees. We all know that the workload of the bank employees
increased a lot. They had to work Overtime.
 The cash flow in banks decreased after demonetization. There was not
much currency in circulation after demonetization thus the government
had restricted the withdrawal amount.
 Interest rates decreased after demonetization. The interest rates were
decreased to Increase lending of money.
 Money lending decreased after demonetization thus the interest rates were
decreased to increase the money lending.
 The use of online banking increased after demonetization due to decrease
in the Circulation of currency and long queues outside ATM and bank
branches people Started using online banking.
 The use of Plastic cards has increased due to less circulation of money in
market
 The number of new accounts have increased because people have to
deposit their Money in the bank account to have new currency
 The functioning of ATM has increased because more and more people are
using the ATM to withdraw their cash and they are using it n number of

61
 times to fulfill their Cash requirement because of the withdrawal limit.
 The numbers of customers in the branches have increased. We have seen
long queues of people outside bank branches and ATM after this
announcement.
 70% of the people believe that there was an impact of demonetization on
the banking Sector.

62
 SUMMARY
This paper is basically empirical in nature and is regarding post effects of
demonetization. Demonetization is a tool Used by central government to fight
against corruption and Black money. In the same path, it influenced and brought
Changes in all the corner of the economy. Banks are major Institutions affected by
demonetization. Though it affected badly to major extent of bank operations, it
helped the Economy to find growth and development of the country through
financial institutions like Banks. At the end of this Research after analyzing the
data collected over here, we can conclude that Demonetization has helped reduce
black Money, bribery and terrorism in India. People have faced Inconvenience
because of demonetization and they are not happy with it. It has not helped the
bank employees as their workload has also increased because of it.
Demonetization has led to the increase in the use of plastic Cards, online Banking,
opening of new accounts, and number of customers in the branches and the use of
ATM. Thus we can say that demonetization has brought positive impact on
banking sector.

63
 SUGGESTIONS

 The new 500 and 2000 banknotes should have been printed and kept ready
for distribution.
 Rs 100 banknotes should have been increased in circulation.
 The new notes should have been of the same weight, thickness and size as
the old Ones.
 Permission should have been granted to cooperative banks to except
deposits and to Exchange notes.
 To solve the problem of black money strong admistrative and tax reforms
should have been implemented.
 For eliminating fake currency the government should have announced a
time period to Exchange the currency (say 3 months).
 Promote the use of cashless transactions.

64
 BIBILOGRAPHY

REFERENCE

 Demonetization and its Impacts in India

https://edupediapublications.org/journals
 www.investopedia.com/terms/d/demonetization.asp
 History of demonetization in India https://www.quora.com/what-is-the-
history-ofDemonetization- Indian-currency
 https://en.wikipedia.org/wiki/2016-Indian-banknote-Demonetization
 Recent Demonetization in India www.investopedia.com
 Benefits of Demonetization in India http://www.quora.com/what-
is-the-reason-behind-recent- currency-Demonetization
 Benefits of Demonetization in India
timesofindia.indiatimes.com/positive- benefits-of- demonetization-on-
our-economy

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