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Effects of Demonetisation on Deployment of Credit
An unusual feature observed in the post-demonetisation period is the striking shift in the lending patterns of scheduled commercial banks, where growth in credit to industry decelerated considerably, while personal loans rose sharply over this period. This article analyses the organisation-wise and occupation-wise trends in the deployment of total outstanding credit during March 2014–March 2020.
As the demonetisation of two high-valued currency notes was announced on 8 November 2016, it sent ripples across India’s financial system and put banks at the centre of the action. The drastic decline in currency-in-circulation was reflected in a direct and immediate increase in low-cost deposits as demonetised bank notes were credited in depositors’ accounts. At the same time, 27 million new Jan Dhan Yojana accounts were also created during this period. As a result, this generated large surplus liquidity conditions in the banking system, which led banks to significantly reduce the weighted average lending rate (WALR) on outstanding loans by 0.5% and WALR on fresh loans by 1% between November 2016 and August 2017. Consequently, this facilitated the transmission of monetary policy to market interest rates over this period through noticeable reductions in both the deposit and lending rates even when the policy rates remained unchanged so that the benefits of cheaper loans could be passed on to the new borrowers at a rapid pace (RBI 2017).
In addition, the government also made efforts to encourage digital transactions by offering incentives to those using digital platforms for money transactions, where charges for online banking were reduced notably. With easy availability of cheap credit and introduction of several discounts on digital transactions, Indian households also demonstrated digital preparedness through increased digital transactions from retail electronic payments, whose growth has increased considerably in both volume and value terms in the post-demonetisation period (RBI 2017). Pushed by cashless modes of transactions together with the penetration of smartphones and cheap mobile data, the route of flexible digital loans offered an easy way to the household sector for instant gratification of their daily needs. This explains the upsurge in the demand for personal loans segment that provided room for the fast growth of these products from a large proportion of credit-underserved population and gave them the incentives to come under the scope of formal credit system.
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