Govt. of India has withdrawn circulation of higher denomination currency notes in Rs 500/- and Rs 1,000/-without prior notice from the midnight of 08/11/2016. This has barred exchanging of said currency notes in the settlement of payments except in a few govt recognized outlets. For exchanging the old currency notes in said denominations in approved financial institutions/post offices, though sufficient time is allowed to avoid panic rush, restriction is put on the number of currency notes that can be exchanged across the counter by a single identity holder to make the process indirectly tedious for holders of un accounted money. Though making remittance for credit of bank account up to Rs 2,50,000/- per any established single identity in his/her Bank account may not pose problems, credit made in the Bank Accounts exceeding that may invite taxation issues, scrutiny, paying tax thereon, paying penalty etc . However there are arguments from some quarters that any amount of cash can be deposited in Bank Accounts by declaring the same as cash income of the current financial year and pay tax on that @ maximum Income tax slab rate applicable. However, validity of argument seems doubtful. If genuineness of source of such income is probed by the Tax Authorities, economic offences if any committed may be detected resulting in penalties. Ceiling on amount that can be withdrawn per bank account, per ATM card etc have reduced the scope for exchanging large volume of tax unaccounted money, called black money.
The sudden move in withdrawing high denomination currency notes will have the following intended direct and indirect implications:
Effort to educate and prompt people to reduce their existing over dependence on currency notes in payment systems. In lieu of that, they may choose settlement systems through Bank accounts, credit cards, debit card, NEFT, RTGS funds transfers etc. Not needing use of currency notes.
Likely, it will widen the scope and prospects for Fintech companies. Moving from currency dominated to less currency [cash] dependent economy. The recently passed bill on implementation of GST no doubt will bring a paradigm shift from sizeable unaccounted cash driven transactions/payments to accounted transactions, thereby increasing the scope for banking system, thereby an inbuilt compulsion for reducing the creation of black money. Black money lending [mostly lending in cash] was a thriving business, such money used in business was further adding black money in the economy and such lending will vanish gradually or its scale will come down. There may be need and thrust for availing bank credit as a recognised source for funds to derive the benefits of accounted transactions. Banks may have new challenges; gear up their enablers for the same with well-planned strategies. If Banks cannot cope with the credit needs of such new entrants to Banking fold seeking Bank Credits it will be imperative for the Govt to create alternative agencies to cater to the credit needs of such prospective borrowers
The demonetising high denomination currency may halt the bad impact of hitherto accumulated currency in such denomination widely used in circulation since independence of the country. Black money capable of carrying the same purchasing power like white money is a great threat to the holders of only limited white money, acquired by their sheer hard efforts for earning livelihood. However, there is no such perennial guarantee that it will be a permanent panacea- as again when new currencies in higher denomination are introduced, illegal accumulation of black money in such new currency notes may again start. Wider non dependence on currency note system and moving to alternative digitised system gradually to substantial extent may be much desired final solution.
Bad effects of existing currency note system like giving scope for rampant fake currency notes circulation, black money hoarded in currency notes of higher denomination used for anti national/terrorist activities, funding elections , property price booming beyond reach of common people by competing usage of such money etc may be brought under control to a great extent. As an after effect, much desired, legitimate hard earned and tax accounted money may start commanding well deserved purchasing power for the common man, reducing bad impact of black money menace.
The dependence on bank credit will increase which will help reducing the scope for generating black money, over dependence on paper currency and scope for increased usage of digital payment systems etc.
The demonetisation has also opened flood gate for increase in the deposits with banks which have to be deployed by them at the earliest. This will pressurise them to widen their outreach to the prospective borrower clients and hitherto neglected may have inclusiveness. Fintech Companies doing borrower/ lender intermediation may have enlarged scope for their operations.
As loan asset creation is imminent need, commensurate increase in capital will be pressurising the Banks to expand their loan books. Banks may be compelled to enter capital markets. Those who cannot augment their capital base may be having lower utilisation rate of increased deposits, thereby pulling down their earnings. There may also be an increased thinking to finance MSME business segment relaxing vintage requirements so that available CGT guarantee may save capital charges for loans. It is unfortunate that lending institutions insist vintage of not less than 3 years to extend loans which means new business units cannot be started relying on Bank Credit, which will have crippling effect on the economy and GDP.
Shrinivasa Bhat H
Banking Domain Advisor, www.Funds Tiger.com