Demonetisation | Banks Face Problem Of Plenty

Indian banks are facing a problem of plenty while millions of people are facing a physical cash crunch. The withdrawal of the high-denomination notes has driven people to collect all the cash lying at home and depositing it into the formal banking system.

Over Rs 2 lakh crore has been deposited into banks ever since the demonitisation of Rs 500 and Rs 1,000 notes were announced on 8th November by the Prime Minister.

Much of those deposits are being invested into government securities sending their yields spiraling downwards. The 10-year g-sec yield has dropped to levels of 6.44 per cent currently. Just before the demonitisation announcement, yields were hovering around 6.8 per cent.

Yields are expected to fall even lower as more physical cash in the economy finds its way back into banking channels.

While banks are facing a problem of plenty on the deposit front, credit growth has been anemic. Corporate credit growth has been negative due to an over-capacity in the economy. Companies are still wary of drawing up expansion plans because demand has yet to tick up.

Retail borrowing is restricted to a few salaried individuals. Bank credit growth in the economy has trickled down to single digits of around 9 per cent, and is largely denominated by the retail segment.

Now with nearly a third of the Rs 16 lakh crore cash that has been sloshing in the economy likely to come back into formal channels, bankers are likely to face a deployment problem.

While government estimates suggest that over Rs 5 lakh crore of cash may not come back into formal banking channels, it still pegs the amount that would eventually come into the banking at around Rs 10 lakh crore.

Even if about 50 per cent of that cash is eventually withdrawn for business and household expenses, there is likely to be at least around Rs 5 lakh crore for banks to lend next year.

Bankers are, however, pointing out that the deploying the cash is no major issue, and that this is still early days as one still has to wait and see what the total deposits in the banking system will be in a few months.

Says K P Nair, deputy managing director: “We will not have a major deployment problem. If you have credit growth coming in, this money could become an accretion in your low cost funds like CASA. We will have to wait and see, because one has to look at what is the total deposit growth in the system.”

Bankers also point out that some cash deposits will again get rolled back into physical currency as demand for cash from households and businesses for working capital increases when systems normalize. Says Nair: “There are two parts. People have kept some emergency cash at home. People are deploying it, and partly exchanging it. So such cash eventually will get withdrawn back.”

For now, bankers are deploying the cash into g-secs driving down yields in government securities.

Meanwhile, the scramble for physical cash at ATMs and bank branches continues, and systems are working on overdrive to get cash to the market. Smaller denomination notes are in huge demand. Bankers are saying they are leaving no stone unturned in moving cash from banks with large cash hoards to places where they are needed.

Banks have also moved staff from administration offices to assist the front office in disbursing cash, and collecting cash. Says K P Nair, deputy managing director, IDBI Bank: “We have moved cash from branches to where we are anticipating demand. We airlifted cash in some places. We have to make sure cash reaches remote places as well.”

Bankers expect that the situation will take about a month to normalize. Small denomination notes are in huge demand. The newer Rs 500 series notes are being released in the economy, and ATM machines are being recalibrated to issue the new notes.