After Effects of Demonetization on Banks

Demonetization is a tool to overcome problems of black money, inflation, crime, and corruption. It discourages a cash-dependent economy and aids trade. Demonetization means withdrawing a note, coin or precious metal from use as a medium for exchange. On 8th November 2016, the government of India announced demonetization and banned Rs 500 and Rs 1000 currency notes. The Reserve Bank of India referred to it as a bold move for demolishing black money and corruption. Chip-based Rs 500 and Rs 2000 currency notes were circulated in the nation by 10th November 2016. This is how our government has dealt with the adversity of corruption, fake currency, and black money.

The banks of India efficiently managed the currency shortage during demonetization. The productivity and efficiency of the Indian banks encouraged a large sum of individuals to join public sector banks. Selection to public banks starts with qualifying for a bank exam such as IBPS PO, SBI PO, IBPS Clerk, etc. Demonetization was managed perfectly by banks and the banking industry was highly affected by it.

After effects of demonetization on banks are elaborated as follows:

Increase in Deposits

Demonetization led to huge deposits entering Indian banks. Unaccounted cash in the form of Rs 500 and Rs 1000 notes was poured into the banks that increased deposits with the banks. SCBs mobilized large sums of deposits, that were redistributed in reverse repos with various tenors of the Reserve Bank of India, Cash Management bills (CMBs) issued under Market Stabilisation Schemes ( included under government securities in the balance sheet of the bank). Advances and loans granted by the banks rose to a good amount of Rs 1,008 billion. The increment deposit credit ratio was marked at 18.2%. In addition to this, the extra deposits with the commercial banks were used in liquid assets.

The Decline in Cost of Funds

After demonetization, banks are keeping a large part of deposits in the form of cash. Public sector banks have over 70% of the deposits, leading to falling in the cost of funds. Surplus Liquidity Conditions aided the dissemination of monetary policy into market interest rates. Following demonetization, many banks decreased their domestic term deposit rates and loan interest rates. The SCBs declined their medium-term deposit rates by 38 bps between November 2016 and February 2017. The overall cost of borrowing had fallen down which allowed banks to decrease their lending rates.

Increase in Demand for Government Bonds

With the increase in deposits post-demonetization, banks started deploying extra deposits to the Reserve Bank of India under the Reverse repo options. Public sector banks choose to invest their funds in government sector bonds. Banks earned good interest on the investment made in government bonds.

Decline in Lending

Even after demonetization, the lending capabilities of Indian banks were considerably low. Banks tried giving loans at low rates to needy groups but it flinched over the past few months.

Rise in Digital Banking

After demonetization, the entire economy turned cashless. This encouraged the general public to use digital banking for monetary transactions. It included the usage of electronic channels such as credit cards, debit cards, Immediate Payment Service (IMPS), RTGS ( Real Time Gross Settlement), and NEFT (National Electronic Funds Transfer). Digitalization in the banking sector has motivated numerous individuals to grab a job in the banking industry.

Turned Economy Cashless

The nation turned cashless served many benefits as stated below:

  • Reduced tax evasion
  • Almost demolished black money
  • Decrease in rates of real estate due to demolishing of black money
  • It will make available bank services everywhere by initiating digital banking so that there is no requirement of maintaining physical infrastructure.
  • The better outcome of welfare programs is as money is directly disseminated into the recipient’s account.
  • Reduction in cost of printing notes, and cost of operating ATMs.
  • Bank customers need not stand in queues and their queries will be solved as soon as possible.

Jan Dhan Account

Post-demonetization, there were around 24 million accounts opened under the Pradhan Mantri Jan Dhan Yojana. 80% of its share is with the public sector banks. The total amount in Pradhan Mantri Jan Dhan Yojana accounts rose to Rs 746 billion in December 2016. It was reported that these accounts were misused to convert black money into white money. Afterward, the government issues a notice stating a warning against the wrong use of these accounts.

The public sector banks of India were always efficient in coping up with economic crises.


The aforementioned points illustrate the after-effects of demonetization on the banks of India. Stern steps were taken by the government of India for eradicating the pernicious effects of corruption, black money, and fake currency.

Read More: New Economic Policy 1991

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