As the repercussions of the demonetisation continue to unfold all around us, we are beginning to understand more and more about the ripple effects of this: some positive, some negative. The suddenly cash rich banks; seeing much higher deposits than withdrawals in recent days are going to cut interest rates. Here’s what is going on:
Banks such as SBI, PNB, HDFC, ICICI and many others are suddenly flush with funds as people deposit either their unaccounted wealth or their cash savings into their accounts so the demonetised notes are not rendered worthless. There are clear expectations that lending rates will fall.
With so much cash at their disposal, banks will be able to lend to borrowers at lower rates of interest. Right now borrowing is down; but when it does pick up, EMIs will be lower and people will be able to buy houses and vehicles paying lower interest components on their loans.
The immediate result of lack of liquidity in the market is that demand for goods and services has slowed; lower demand means lower inflation as well. However the slowing of production could mean less goods in the market and higher inflation in the middle term, warm some economists.
One welcome change has been the fact that under the counter lending or grey market loans have taken a big hit. Lenders would earlier charge usurious rate of up to 30%, now that rate has come down to 5%. These clandestine transactions would be done in cash; but with the withdrawal of 500 and 1000 rupee notes, there just isn’t any cash to lend.
Property is where much of unaccounted income is generally invested; black money is usually a big component in property transactions. Now that people are unable to transact in cash – at least for the time being, this will mean that property prices will come down. On the downside, property owners looking to sell property will also see their property fetch much lower rates.
With money pouring into the banking system, banks are now able to write off nonperforming assets (NPA) such as bad loans. The State Bank of India has written off loans of willful defaulters to the tune of Rs 1201 crores; this includes unpaid loans taken by Vijay Mallya's Kingfisher Airlines. According to reports, 63 loan accounts have been written off, 31 have been partially written off and six are now declared NPAs.
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