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Impact of Demonetization on Banks: A Comparative Study of Non-Performing

Assets (NPAs)
Article · August 2020
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International Journal of Research in Economics and Social Sciences(IJRESS)
Available online at: http://euroasiapub.org
Vol. 10 Issue 8, August- 2020
ISSN: 2249-7382 | Impact Factor: 7.077 |
Impact of Demonetization on Banks: A Comparative Study of Non-Performing Assets

(NPAs)
Mohd Saleem, Assistant Professor

Teerthanker Mahaveer University, Moradabad (U.P.)
Dr Matloob Ullah Khan, Assistant Professor
Jamia Hamdard, New Delhi
Abstract: Demonetization has been a matter of discussion even after a gap of many years. Many
researchers have done tremendous work on it. The impacts and outcomes are always in the centre of
debate. This paper is an empirical research and in this, it is tried to find the impact of demonetization
on banking system especially the growing NPAs. The other aspects of demonetization were also
discussed to correlate the impacts of note ban and growing NPAs. Though the negative impacts are
always discussed but this research focuses on many positive outcomes of demonetization. The role of
banking system cannot be ignored as banks have been in a catalyst position throughout the process
and period of demonetization.
Key Words: Demonetization, Note Ban, Non-Performing Assets (NPAs), Cashless Economy, Public
Sector Banks (PSBs)
83
International Journal of Research in Economics & Social Sciences
Email:- editorijrim@gmail.com, http://www.euroasiapub.org
(An open access scholarly, peer-reviewed, interdisciplinary, monthly, and fully refereed journal.)
1. Introduction:
The banking system has been an important pillar for any economy. But it should be considered
in very comprehensive manner. In other terms, Banks have a very deep reach in any economy
and any change in banking policies would have a multidimensional impacts on economy and
its people.
It is well known that in November 2016, The Prime Minister of India took a very strange
decision and announced to ban the currency notes of Rs 500 and Rs 1000. This decision had
been criticised on different grounds but government put its views to justify the need of this
decision. Here is some points given by government to explain the benefits and objectives of
demonetization such as:
➢ Curb on Black Money

➢ Attack on Terrorism
➢ Resistance to Corruption, and
➢ Encouragement of Digital Money
These were some of the important justification in support of demonetization. But other side of
the coin was unseen and undiscussed. This paper will try to find out the fulfilment of the
objectives and drawbacks of note ban especially in context of Banks. The problem of growing
NPAs after demonetization would be in focus.
Demonetization is a process in which existing and prevailing currency notes in a financial

system is banned and withdrawn from the circulation. New series of currency notes of different
or same denomination are introduced to fill the gap aroused due to note ban.
Non-Performing Assets (NPAs) is a loan or assets granted by the bank and which become non-
productive. According to Reserve Bank of India, “NPAs is an assets becomes nonperforming
when it ceases to generate income for the bank”.
2. Review of Literature:
(Bansal, Jan, 2017) In view of the author, demonetization can be understand as a surgical
strike on Black Money, Terrorism, and Fake Currency. The author considered above factors
responsible for demonetization.
International Journal of Research in Economics & Social Sciences 84

(Paramahamsa & Eliot, 2017) Author tried to find the long term and short term cost of
demonetization. The benefits of cashless economy was also in focused. Further he highlighted
the impact of demonetization on black money, fake currency, and circulation of currency,
corruption and taxation.
Mittal and Suneja (2017) Authors have evaluated the causes of growing NPAs and its status.
He suggested that the government has taken numerous steps to tackle the problem. He also
suggested the bank need to be precautious and active while granting the loans.
3. Research Gap:
The reading of above literature shows the nature of previous studies. The more emphasis has
been given on the impact of demonetization on Agriculture, GDP, Black Money and
Corruption. There are quite few research studies on NPAs in context of demonetization. So this
paper will try to focus on NPAs position after note ban.
4. Objectives of the Study:
The objective of this study would be-
➢ To analysis the objectives of demonetization

➢ To know the status of NPAs after demonetization
5. Scope of the Study:
This study is focused on how note ban has affected the banking system especially in context of
growing (Non-Performing Assets) NPAs. There are many proved adverse results of
demonetization so the need to analysis the impact of all them including note ban on banking
system, is vital. It would be helpful to the banking system in particular. The impact of note ban
would be examined and the results would guide to the way to adjust the negative impacts. This
study would also help government, businesses, and financial system to understand the scenario.
Banks would be benefited in context of policy formulation to come out from the curse of
demonetization in general and how to tackle the problem of growing NPAs.
6. Methodology:
This research paper is based on empirical study of phenomenon before and after
demonetization. Secondary data is used in this paper. This data is collected from journals,

websites, financial newspaper, articles and government sources of data. The measurement and
outcomes are based on specific situation, expert’s opinion and behavioural observations
derived from the study of different sources mentioned above.
7. Demonetization and Economy:
Dr Manmohan Singh, Former Finance Minister, Former Governor Of Reserve Bank of India
and An Eminent Economist has a very clear and prominent view point on demonetization. He
commented on note ban as “monumental mismanagement…, organised loot and legalised
plunder”. Further he said “In long run, we are all dead” as quoted by India Today, a well-known
media house in India.
Like Dr Manmohan Singh, many other prominent experts had criticized the decision of note
ban. In real sense their observations and predictions have become true in many cases. It has
been a long time since demonetization and the scares of it have become more visible. The
drawbacks have been surfaced in the form of unemployment, low growth rate, agricultural slow
down etc. Though there are so many positive symptoms of it such as promotion and acceptance
of digital payment system, tax collection on black money through Income Declaration Scheme
2016 etc. But another facet has more visible and noticeable impacts.
Major adverse impact of demonetization are as follows:
➢ After demonetization, many people lost their lives while getting in queue for currency
exchange.
➢ It has been a very costly affairs for Reserve Bank of India. RBI printed new currency
note as a replacement of banned note which proved to be a financial burden.
➢ The unorganized sector was badly affected by note ban as maximum transactions in this
sector happen in hard cash and it hampered the growth of GDP.
➢ Agriculture has been a main source of income and livelihood for majority of population
in India and most of them are part of unorganized sector. Agriculture and its allied
activities provides employment to approx. half population of the country and
contributes significantly in GDP and export. This sector has been hit badly by sudden
and improvised decision of demonetization.

➢ Another area which badly affected and destroyed by demonetization, is service sector.
This sector has been an important and a major contributor to GDP. Both organized and
unorganized part of this sector suffered a lot by this move.
➢ Apart from above mentioned cases, there are many areas where demonetization become
disastrous. As a result, the availability and generation of employment was hampered
and many people lost their job or employments.
8. Demonetization and Banks:
This part of the research article is focused on the relationship between demonetization and the
performance of loans granted by public sectors banks (PSBs) in India. The banking system has
been in a leading position throughout the phase of demonetisation and a source of capital for
many of the productive projects during other days. In simple terms, Banks creates credit for
business needs as well as personal needs by way of accepting deposits and landing the funds
to the different parties. When a Bank receives a deposits from an individual customer, this
deposit is used for the landing purpose with the cost and this cost is called interest.
When demonetization occurred, individual and organisational customers rush to the banks for
depositing their cash in hand and afterward there has been a sense of insecurity regarding fund
deposited into the banks due to the moratorium conditions imposed by RBI. It has been a trust
killer for many customers who were dependent or having the services of the banking system
for their money and its circulation.
As per the data released by some of eminent and premier institutes of India like Reserve Bank
of India and Press Information Bureau Government of India, Ministry of Finance, the amount
of non-performing assets have grown to 9 lakh crore approximately till 2018. The high amount
of poor assets or non-performing assets indicates the poor financial health, liquidity position
and lending practices has not been so productive. During last few years after note ban the credit
growth and financial performance of the banks hampered badly.
It is obviously clear that after demonetization the growth of non-performing assets increased
rapidly. There is Tabular and graphical representation of data showing the position of non-
performing assets before and after note ban which is happened in 2016.

Year NPAs of PSBs (Crore)

March, 2015 2,79,016
March, 2017 6,84,732
March, 2018 8,95,601
March, 2019 8,06,412
Source: Press Information Bureau Government of India, Ministry of Finance
10,00,000
8,95,601
9,00,000
8,06,412
8,00,000
6,84,732
7,00,000
6,00,000
5,00,000
4,00,000
2,79,016
3,00,000
2,00,000
1,00,000
0
March, March, March, March,
2015 2017 2018 2019
Source: Press Information Bureau Government of India, Ministry of Finance
As the loans granted by PSBs and simultaneous all around deteriorating business and
economics conditions due to the demonetization, there has been a significant growth in NPAs.
It has been growing from ₹2,79,016 crore as on March 31, 2015 to ₹6,84,732 crore as on
March 31, 2017, ₹8,95,601 crore as on March 31, 2018 and ₹8,06,412 crore as on March 31,
2019. Though there is a marginal decline in the amount of 2019 in comparison of 2018. It is an
insignificant change of relief. The need for the minimising the amount of NPAs must be in
focus and practice.

9. Conclusion:
In an economic system results of banks are always a feedback of economic and monetary
policies. During the last few years after demonetisation the credit culture has been changed.
The curse of demonetisation is more visible and prevailing in the economy still.
There is a very interesting fact that direct relationship cannot be established between growing
non-performing assets and demonetisation. But it is obviously demonetisation which develops
such conditions due to which there has been uncertainty, disturbance, and policy failure in the
Indian economy especially in banking system. The numerous factors are here to establish
the indirect relationship between note ban and growing positon of NPAs in banks. As discussed
above, demonetization has a direct impact on:
➢ Employments
➢ Consumptions
➢ Unorganized Sectors
➢ Rural Economy
➢ Agriculture
➢ Growth of GDP
These are some prominent areas where demonetization has given serious wounds and apart
from it, the recovery from this situation is hampering due to the lack of policies for employment
and economic growth. These factors have a direct or indirect relation with banking systems.
Many of the entrepreneur who took the loan from banks and due to economics condition
aroused after note ban, they could not generate ample of revenue to repay the cost including
the loan taken from banks. Such kind of situation is contributing to the growth of NPAs.
But there may be many who intentionally or unintentionally defaulting in respect to bank’s
loan. In such conditions, banks need to follow standard practices suggested by statutory bodies
concerned with banking and financial system. As the government has taken numerous steps to
curb the problem, banks must also be active and sincere for formulating effective policies and
strict implementation of these policies must be ensured to control NPAs. The loan seeker credit-
worthiness is always a matter of concern in respect of return and risk associated with the
customer.

References:
i. http://ijasret.com/VolumeArticles/FullTextPDF/116_IJASRET-
Impact_of_Demonetization_on_NPA_position_of_Indian_Banks.pdf
ii. https://www.researchgate.net/profile/Dimpal_Vij/publication/323076692_Demon
etization_Effects_on_Indian_Economy/links/5a7e4f09aca272a73765d055/Demon
etization-Effects-on-Indian-Economy.pdf
iii. http://www.ijtrd.com/papers/IJTRD7787.pdf
iv. https://pdfs.semanticscholar.org/72bd/eb5266d743776d7de98f0ec1b50abef92811.
pdf
v. http://www.indianjournals.com/ijor.aspx?target=ijor:ijemr&volume=7&issue=3
&article=142
vi. https://search.proquest.com/openview/6c78167bf62b8ece8dde4488bff45b67/1?pq
-origsite=gscholar&cbl=2028922
vii. https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx%3FId%3D449
viii. https://www.indiatoday.in/india/story/manmohan-singh-demonetisation-modi-
parliament-353725-2016-11-24
ix. https://www.outlookindia.com/outlookmoney/magazine/story/demonetisation-
assessment-of-its-impact-385
x. https://www.puneicai.org/wp-content/uploads/ASSESSMENT-OF-
DEMONETISATION-ERA-BY-CA.-PRAMOD-SHINGTE-1.pdf
xi. https://www.indiatoday.in/india/story/demonetisation-what-india-gained-and-
lost-1327502-2018-08-30
xii. https://qz.com/india/1373030/modis-demonetisation-did-nothing-for-india-
shows-rbi-report/
xiii. https://www.semanticscholar.org/paper/Demonetization-and-Its-Impacts-in-
India-Kaur/3cb6945e7c4ef5dd35c8db0e56f82d91cac96e04
xiv. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3066042
xv. Bansal, J. (2017). IMPACT OF DEMONETIZATION ON INDIAN ECONOMY.
International Journal of Science Technology and Management, 6(1), 598-605.
Retrieved January, 2017
(1) (PDF) Impact of Demonetization on NPA Position of Indian Banks.

xvi. Paramahamsa, R., & Eliot, G. (2016-17). Demonetisation: To Deify or Demonize?

Retrieved March 14, 2017, from http://indiabudget.nic.in/es2016-17/echap03.pdf
(1) (PDF) Impact of Demonetization on NPA Position of Indian Banks.
xvii. Mittal, R.K. and Suneja, D. (2017), “The problem of rising non-performing assets in
banking sector in India: comparative analysis of public and private sector banks”,
International Journal of Management, IT and Engineering, Vol. 7 No. 7, pp. 384-398.
xviii. https://pib.gov.in/newsite/PrintRelease.aspx?relid=190704
xix. https://pib.gov.in/newsite/PrintRelease.aspx?relid=191437

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Impact of Demonetization on Banks: A Comparative Study of Non-Performing

Article · August 2020

The user has requested enhancement of the downloaded file.

Impact of Demonetization on Banks: A Comparative Study of Non-Performing Assets

Mohd Saleem, Assistant Professor

➢ Curb on Black Money

Demonetization is a process in which existing and prevailing currency notes in a financial

International Journal of Research in Economics & Social Sciences 84

4. Objectives of the Study:

The objective of this study would be-

➢ To analysis the objectives of demonetization

5. Scope of the Study:

International Journal of Research in Economics & Social Sciences 85

7. Demonetization and Economy:

Major adverse impact of demonetization are as follows:

International Journal of Research in Economics & Social Sciences 86

8. Demonetization and Banks:

International Journal of Research in Economics & Social Sciences 87

Year NPAs of PSBs (Crore)

Source: Press Information Bureau Government of India, Ministry of Finance

International Journal of Research in Economics & Social Sciences 88

International Journal of Research in Economics & Social Sciences 89

International Journal of Research in Economics & Social Sciences 90

xvi. Paramahamsa, R., & Eliot, G. (2016-17). Demonetisation: To Deify or Demonize?

International Journal of Research in Economics & Social Sciences 91

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