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Bank credit plunges by Rs 61,000 crore in post note ban fortnight

Wednesday, December 14, 2016

The demand destruction unleashed by the November 8 demonetisation drive saw the bank credit shrinking by a whopping Rs 61,000 crore, or 0.8%, during the fortnight to November 25, show the latest RBI data. But at the same time, the note ban also had a positive effect, as borrowers, including some default accounts, paid back as much as Rs 66,000 crore during the same period.

In sharp contrast, during the same fortnight, banks received huge inflows as people deposited as much as Rs 4.03 trillion into the accounts, which as of December 9 crossed Rs 12 trillion, putting all calculations of the Government into a tizzy. Analysts supporting the cash recall move initially claimed that at least 20%, or a little over Rs 3 trillion - out of the total Rs 15.4 trillion of the banned banknotes  - would not come back to the banking system, helping the Government net a windfall from the exercise whose stated aim is to root out black money and curb corruption.

This, they claimed, would be achieved by writing off a similar amount from the balancesheet of the central bank and then transferring the same the Government as surplus. But with the near total return of the banned notes, all these calculations have gone out of the window. The outstanding credit of banking system stood at Rs 72.92 trillion as of November 25, according to the Reserve Bank data. The year-on-year credit growth was just 6.6%, down from 9.3% a year ago.

Bankers say there has been a sharp plunge in credit demand as the economy began to feel the adverse effects of the decision to withdraw legal tender status of old currency notes of Rs 500 and Rs 1,000. This plunge in bank credit came after another Rs 59,000-crore dip in the previous fortnight to November 11, showing the initial impact of the Nov 8 announcement to decommission high value notes.

The deposits banks rose by 4% in the fortnight to Rs 105.177 trillion, pushing the annual growth to 15.9% as against 9.8% a year ago.

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