 "<b>Demonetisation impact on banking:</b> Bankers' tryst with trust")
A top official of a leading public sector bank sums up bankers’ plight in the past 50 days: “Whether it is a good or bad decision, it is important to communicate. And, the Reserve Bank of India (RBI), led by Governor Urjit Patel, did not do it convincingly since demonetisation of Rs 500 and Rs 1,000 was announced.”
Says Usha Thorat, former deputy governor, RBI: “The central bank had established a high standard of communication and credibility. It is sad that its reputation has been hit after the decision to withdraw high-value notes.”
Patel, in the post-policy press meet on December 7, stoutly defended demonetisation and said there wasn’t any issue of trust deficit in banks. Many have expressed fears that the age-old relationship between bankers, especially in the public sector, and customers has taken a serious knock. Bankers, being the face of currency shortage, bore the brunt of customer dissatisfaction. There were squabbles, threats, and some even died in the line of work.
Bank managements were forced to set aside routine work such as credit appraisal and lending, and concentrate on managing the deluge being deposited. The sharp rise in flows stumped many. Some leading banks, beside re-employing retired hands, had to redesignate a huge number of employees from existing operations to manage the cash inflow and outflow in the initial days.
In the first fortnight after demonetisation, banks received as much as Rs 4 lakh crore. Within one month, the number trebled. As on December 10, Rs 12.4 lakh crore had been deposited with banks. Given that the currency in circulation was Rs 15.4 lakh crore on November 8, there are expectations that most of it would have been deposited by now.
But, while deposits shot up, credit slowed. The two fortnights saw continuous fall in credit due to demand destruction. The outstanding loans of banking system fell by about Rs 1.2 lakh crore (Rs 59,000 crore on November 11 and Rs 61,000 crore on November 25. Credit grew by Rs 46,800 crore in the fortnight ended December 9.
Many smaller and mid-sized banks suffered badly. Says a banker in a mid-sized one: “Smaller banks which don’t have many currency chests had to call in favours from friends and former colleagues in other banks to give money to customers.”
The remonetisation process has been slow but steady. Between November 10 and December 19, RBI issued banknotes of over Rs 5.92 lakh crore to the public (see table: Key Numbers).
The excess money made life tough for both banks and the regulator. RBI, initially, did try to absorb excess money through its Liquidity Adjustment Facility. After running out of the stock of securities, it slapped a 100 per cent cash reserve ratio on new deposits that had flowed in between September 16 and November 11 as an interim measure, impounding over Rs 3.25 lakh crore. Bond yields, which were moving southwards during the entire year, soon began inching upwards. In early December, RBI raised the ceiling of government securities issued under the Market Stabilisation Scheme (MSS) to mop up excess liquidity to Rs 6 lakh crore, from the earlier Rs 30,000 crore.
During these 50 days, bankers’ role has also come under question. Bank branches and officials of several banks were under heavy scrutiny and some were even arrested for laundering money. So were a few junior RBI officials.
Post December 30, things might change a little but bankers have expressed serious doubts if the withdrawal limit will be increased from Rs 24,000 per week soon. Reports suggest that there could be relaxation if the cash situation improves. State Bank of India (SBI) Chairman Arundhati Bhattacharya has also indicated recently that restriction on withdrawals cannot be lifted entirely unless more cash is made available to banks.
According to SBI’s research only half of the total value of the demonetised notes is likely to be supplied back into the system by the December 30 deadline and the cash crunch may be normalised only by end-February at the earliest. “At the end of February, 78-88 per cent of the notes could be back into the system under the best-case scenario,” says the SBI report.
Says Usha Thorat, former deputy governor, RBI: “The central bank had established a high standard of communication and credibility. It is sad that its reputation has been hit after the decision to withdraw high-value notes.”
Patel, in the post-policy press meet on December 7, stoutly defended demonetisation and said there wasn’t any issue of trust deficit in banks. Many have expressed fears that the age-old relationship between bankers, especially in the public sector, and customers has taken a serious knock. Bankers, being the face of currency shortage, bore the brunt of customer dissatisfaction. There were squabbles, threats, and some even died in the line of work.
Bank managements were forced to set aside routine work such as credit appraisal and lending, and concentrate on managing the deluge being deposited. The sharp rise in flows stumped many. Some leading banks, beside re-employing retired hands, had to redesignate a huge number of employees from existing operations to manage the cash inflow and outflow in the initial days.
In the first fortnight after demonetisation, banks received as much as Rs 4 lakh crore. Within one month, the number trebled. As on December 10, Rs 12.4 lakh crore had been deposited with banks. Given that the currency in circulation was Rs 15.4 lakh crore on November 8, there are expectations that most of it would have been deposited by now.
But, while deposits shot up, credit slowed. The two fortnights saw continuous fall in credit due to demand destruction. The outstanding loans of banking system fell by about Rs 1.2 lakh crore (Rs 59,000 crore on November 11 and Rs 61,000 crore on November 25. Credit grew by Rs 46,800 crore in the fortnight ended December 9.
Many smaller and mid-sized banks suffered badly. Says a banker in a mid-sized one: “Smaller banks which don’t have many currency chests had to call in favours from friends and former colleagues in other banks to give money to customers.”
The remonetisation process has been slow but steady. Between November 10 and December 19, RBI issued banknotes of over Rs 5.92 lakh crore to the public (see table: Key Numbers).
The excess money made life tough for both banks and the regulator. RBI, initially, did try to absorb excess money through its Liquidity Adjustment Facility. After running out of the stock of securities, it slapped a 100 per cent cash reserve ratio on new deposits that had flowed in between September 16 and November 11 as an interim measure, impounding over Rs 3.25 lakh crore. Bond yields, which were moving southwards during the entire year, soon began inching upwards. In early December, RBI raised the ceiling of government securities issued under the Market Stabilisation Scheme (MSS) to mop up excess liquidity to Rs 6 lakh crore, from the earlier Rs 30,000 crore.
During these 50 days, bankers’ role has also come under question. Bank branches and officials of several banks were under heavy scrutiny and some were even arrested for laundering money. So were a few junior RBI officials.
Post December 30, things might change a little but bankers have expressed serious doubts if the withdrawal limit will be increased from Rs 24,000 per week soon. Reports suggest that there could be relaxation if the cash situation improves. State Bank of India (SBI) Chairman Arundhati Bhattacharya has also indicated recently that restriction on withdrawals cannot be lifted entirely unless more cash is made available to banks.
According to SBI’s research only half of the total value of the demonetised notes is likely to be supplied back into the system by the December 30 deadline and the cash crunch may be normalised only by end-February at the earliest. “At the end of February, 78-88 per cent of the notes could be back into the system under the best-case scenario,” says the SBI report.