June 13, 2017
Even SBI says demonetisation hurt India
All India Trinamool Congress has put out a statement on the Placement Document released by the State Bank of India (SBI) that demonetisation has slowed down and may continue to slow down the Indian economy.
The SBI document basically confirms what Trinamool Congress has been saying right from November 8, 2016, the day demonetisation was announced – that the move would impact the Indian economy badly and would lead to more harm than good in the future. Right from that time, Chief Minister and Trinamool Congress Chairperson Mamata Banerjee has put together and led the Opposition protests right across the country.
According to the Placement Document, demonetisation has had a significant impact on the Indian economy. The ten key points from the document have been summarised in the report.
The spike in bank deposits due to the returning of demonetised currency notes has created large surplus liquidity conditions in the banking system, leading to an increase in the cost of aggregate deposits and a resultant lowering of term deposit rates.
Consequently, SBI may face increased competition from commercial banks and other lending institutions, and hence, suffer a loss in profitability. It could also potentially result in an increase in compliance costs and higher incidents of fraud.
The full statement is given below:
The recently released Placement Document by State Bank of India, states that demonetisation has and may continue to result in a slowing down of the Indian economy.
Here are 10 points from the document:
- Demonetisation has had a significant impact on the balance sheet of scheduled commercial banks (SCBs), both in terms of size and composition.
- Decline in currency in circulation on account of demonetisation led to a surge in bank deposits.
- With the return of specified bank notes (SBNs) to the banking system, while currency in circulation contracted, deposits in the banking system increased. The sudden increase in deposits (given the gradual replacement of SBNs by new notes) created large surplus liquidity conditions in the banking system.
- Post-demonetisation, sharp increase in the share of current account and savings account (CASA) deposits in aggregate deposits by 4.10% to 39.30% (as of February 17, 2017).
- This has resulted in a reduction in the cost of aggregate deposits, and banks have correspondingly lowered their term deposit rates.
- The median term deposit rate declined by 38 basis points (bps) during November 2016-February 2017.
- The decline in the cost of funding resulted in decline in the one year median marginal cost of funds based lending rate by as much as 70 bps post-demonetisation.
- SBI may face increased competition from commercial banks and other lending institutions.
- Increased competition may have an adverse effect on the net interest margin and other income and if it is unable to compete successfully, its profitability may decline.
- The move could also result in an increase in compliance costs and higher incidents of fraud.