Whether Narendra Modi's radical plan to withdraw currency notes of Rs 500 and Rs 1000 has a prolonged impact on India's parallel economy or not is debatable, but it will brighten things up for India's banking sector.
Banks stand to benefit in more than one way as the public continues to camp outside bank branches to deposit their old bills, said a report by Moody's Investors Service released on Wednesday.
Retail Boost
Despite a number of private e-wallet players popping up, India's banking sector heavily dominates the retail payment system which will be a clear beneficiary of the cashless state of the country.
"People may see these channels as being much more convenient compared to the hassle they may experience in transitioning to the new denomination notes,” the report explained.
Increased Deposits
The BJP-led government's move will pull a large chunk of first time users to banks, who will have to use the system at least once to exchange their old notes for new ones. According to a study conducted by Moody's, people tend to continue using banking services once they have crossed the 'first-time user' mark.
This development will increase bank deposits by 1 to 2 percent compared to what they were before the demonetisation scheme, the report claimed. This, of course, will happen after the initial surge of deposit inflows, followed by sharp outflows, stabilize in roughly three months from now.
Though the sudden withdrawal of 86 percent of currency (in terms of value) from the economy will not reduce people's dependency on cash in the near term, bank deposit levels will benefit in a "more meaningful fashion" once the informal economy is brought into the formal economy over the next few years.
While banks stand to benefit from some aspects of demonetisation, there could be a negative fallout as well.
Moody's expects the asset quality of loans against properties to deteriorate as real estate, which often involves black money transactions, will be hit by demonetisation. Even the micro-finance segment will be impacted since it is primarily a cash heavy segment.
With doubts about how long this storm will last, the report warns that the banking system and the corporate sector (both small and big) will be deeply impacted if the "economic weakness" prevails for a longer period of time.
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