Industry and Banks reaction on demonetising of the existing Rs 500 and Rs 1,000 notes


Mumbai, 8 November, 2016 (GPN) : Mr. Amit Sachdev- Co-founder and CEO, CoinTribe said, “Mr Modi’s move is a watershed moment in India’s fight against the ubiquitous black money issue executed with the finesse and secrecy this issue deserves. While this will have several significant benefits for the economy in the long term, there is likely to be a negative impact on sectors with high cash economy in the immediate term. Sectors like Real estate, construction material, unorganized trade and services will see significant pain in the near term. With liquidity drying up, both NPA and demand for working capital credit are likely to go up. In view of bank’s ongoing NPA issues, how fast will banks react to this situation will be interesting to watch. With limited tax arbitrage between organized and unorganized segments, India will see much sharper move from unorganized to organized segment.

He further added, “In the long term, though, this is likely to drive several benefits for the economy. India has made the first move from cash economy to a digital economy. Larger amount of savings and cash will find a way into the mainstream economy and be deployed for physical and financial asset creation. Use of digital currency and payment systems driven by UPI, wallets and cards will create enormous transparency and paves way for faster evolution of Fintech companies in India especially in transactions and Online lending space”.
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Mr Modi has made the right investment for the next generation. This move should improve India’s position on transparency and corruption in the global league table enabling higher capital flow (FDI/FII) into India. It would be good step for government to think of another VDS scheme with 70-80% penalty rate to bridge fiscal deficits,”said Mr. Amit Sachdev- Co-founder and CEO, CoinTribe

The demonetising of the existing Rs 500 and Rs 1,000 notes will be a tough task for the banks to handle in the short-term as people will be queuing up to exchange the notes.

Top Bankers -File photo GPN network.

Top Bankers -File photo GPN network.

However, top bankers are unfazed by the decision. Top bankers said they would work round the clock to ensure that customers do not suffer and the situation is handled smoothly.

Chanda Kochhar, MD and CEO, ICICI Bank-Photo by GPN Network

Chanda Kochhar, MD and CEO, ICICI Bank-Photo by GPN Network

Chanda Kochhar, MD & CEO, ICICI Bank said: ” I welcome the announcement made by the PM to derecognise Rs 1000 & Rs 500 notes. It is perhaps the most significant move ever taken to curtail the parallel economy. This move will give a sharp boost to all formal channels of payment which in turn will help the formal economy to grow. ”

Arundhati Bhattacharya CMD State Bank of India. - Photo by GPN Network

Arundhati Bhattacharya CMD State Bank of India. – Photo by GPN Network

Arundhati Bhattacharya, chairman of country’s largest lender State Bank of India said demonetisation of high value notes won’t be a problem as the bank has done it before.
“We have just now been advised of the government move to demonetise current series of Rs 1,000 and Rs 500. We have handled demonetisation earlier and will do so again,” Bhattacharya stated.

Banks will remain closed on Wednesday in order to withdraw the existing notes from counters and ATMs. They would, in turn, “strive to restock ATMs at the earliest and make them operational. Government has given enough exemptions to ensure that urgent needs are met. We will work round the clock to ensure that customers have a smooth experience,” Bhattacharya said.

Speaking at a press conference after the PM’s televised address to the nation, RBI governor Urjit Patel assured that there has been no breach in security of the existing notes, but the fake notes in circulation look similar and could be difficult to identify by untrained eyes.

“As of today we have ramped up production of the new series of notes,” the RBI governor said. The new Rs 500 and Rs 2,000 notes would start coming to banks from November 10 onwards, said Economic Affairs Secretary Shaktikanta Das.

But some bank customers are already in panic mode and bank ATMs had long queues as people were seen withdrawing cash below Rs 500 multiple times. Bankers say the ATM handling charges will increase as the same machines will have to be replenished several times in a day.
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Religare Capital Markets |  Banks/NBFCs: Impact post govt’s move notes by Parag Jariwala, CFA, VP – Institutional Research, Banking and Financial Services, Religare Capital Markets Limited.

 Microfinance – no major impact: We spoke to few microfinance companies to access the impact on the sector. Majority believe that it will be difficult to collect / disburse cash in the near term. However, things are likely to stabilise in 15-20 days and therefore in the worst case they may have to postpone collection of 1-2 EMIs and disbursements may not happen in the next 10 days due to non-availability of currency notes. We don’t see major medium / long term impact on these companies.

 

Non-banking finance companies: We believe that LAP portfolio will see dual negative impact 1. Borrower class with low disclosed income and high dependence on cash receipts may suffer. MSME / SME borrowers (particularly with ticket size of Rs 10-50mn) may see their cash flow getting impacted in the short term. 2. In our view, real estate prices particularly in areas where cash components is high may come-off meaningfully impacting collateral value. We see asset quality and growth issues for NBFCs present in mid / large LAP segment.

 

Housing finance companies: Developer loans / high ticket LAP loans are likely to face asset quality and growth issues. Overall, we believe purchasing power of business community may get impacted in short / medium term which is negative for real estate prices. Individual housing loan portfolio will also slow down which is negative for HFCs.

 

What to Buy? We see tremendous long term benefits for banks as cash / parallel economy as a proportion to total economy declines. Interest rates will come-off (more deposits in the system) and credit off-take will improve (companies which are impacted due to parallel economy e.g building materials will benefit). Proportion of cash less transactions will go up benefiting banks in general.

 

About the Author

Sachin Murdeshwar
Sachin Murdeshwar is a Sr.Journalist and Columnist in several Mainline Newspapers and Portals.He is an ardent traveller and likes to explore destinations to the core.