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'Bank deposit to see sharp decline once withdrawal norms ease'

Thursday, November 17, 2016

With about Rs 4 lakh crore coming into the banking system within a week after demonetisation, Moody's Investors Service yesterday cautioned that banks' deposit base will witness a "sharp decline" as and when the current restriction on cash withdrawals eases. In a major assault on black money, counterfeit notes and terror financing, Prime Minister Narendra Modi had on November 8 announced demonetisation of Rs 500 and Rs 1,000 notes and asked holders of such bills to deposit them in banks.

Moody's said the trend of significant inflows will continue for the next 3-4 weeks. "But, as cash availability increases and the current restrictions on cash withdrawals are lifted, sharp declines in the deposit base will occur in the near future," Moody's said. Once this volatility subsides and stability is achieved, possibly around three months from now, we estimate that bank deposits will increase by around 1-2% compared to what they would have been before the demonetisation scheme, it added.

In order to ensure sufficient cash availability in the system, people have been allowed to withdraw only Rs 24,000 in a week through cheque. Besides, the daily withdrawal limit from the recalibrated ATMs stands at Rs 2,500. Moody's said the expectation of a relatively low level of increase is based on the assumption that the role of cash – as a medium of transaction – will not change materially in the near term in India's economy.

"However, as the cash intensity of the economy reduces over the medium term, driven by a combination of the informal economy coming into the ambit of the formal one and a higher proportion of cashless payments, bank deposit levels may benefit in a more meaningful fashion," Moody's said.

According to official estimates, Rs 500 and Rs 1,000 notes account for around 86% of the existing currency in circulation and around 9.5% of GDP. Of the Rs 14 lakh crore of high-denomination notes, an estimated Rs 4 lakh crore has come into the banking system since November 8.

However, once the transition is complete, asset quality may stabilise. The broader asset quality of the banking system would be impacted if economic
conditions remain affected beyond the transition period, Moody's added.

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