By Meghaa Gangahar
The Chairman of the State Bank of India, Arundhati Bhattacharya, stated that it is still too soon to predict the true impact of demonetisation at the 47th World Economic Forum in Davos. She did, however, share the speculation that it might cause some stress on the quarter ending in March 2017.
The impact of a liquidity crunch
[su_pullquote]Fewer purchases over some time have slowed down businesses, and thus the overall economic activity.[/su_pullquote]
While the long term effects still remain contentious, the only certain short-term effect has been the contraction of liquidity among consumers. Since approximately 86 per cent of all currency in circulation had been demonitised, cash transactions in the short-run contracted. The cash crunch facilitated digital payment services which include the government-backed Unified Payments Interface. Even though online transactions were boosted, it was not nearly enough to offset the setback in cash transactions. Fewer purchases over some time have slowed down businesses, and thus the overall economic activity. Even though the economy has slowed down, the reduction in economic activity is yet to be ascertained.
The Indian economy tried its best to go cashless but the number of transactions occurring haven’t been able to match up to the ones that used currency | Photo Courtesy – Hindustan TimesAnother consequence of the liquidity crisis is that people have been seeking extensions on their working capital loans. Even though the SBI chief doesnt think that stressed debt has increased too much, she urged the need to monitor the Micro, Small and Medium Enterprises (MSMEs). Since the MSMEs operate on a smaller scale, their transactions are mostly cash-based and are most susceptible to the risks of cash-scarce economy.
[su_pullquote align=”right”]The chief expects that SBI will retain between 15 to 40 per cent of the deposit boost due to demonetisation.[/su_pullquote]
The SBI chief estimates the total currency in circulation to be approximately Rs. 10 lakh crore and anticipates that the situation will normalise by the end of February. The chief expects that SBI will retain between 15 to 40 per cent of the deposit boost due to demonetisation. Retaining more deposits would mean lower interest rates. While SBIs loan book contracted after the ban, advances are expected in the quarter up to 31st March 2017.
As further currency comes into the system, the caps on withdrawals will be relaxed. Bhattacharya believes that the digital payments might dip as the caps on withdrawals are eased, but advises against abandoning digital initiatives. She opines that if people do not embrace advanced technology, its benefits may never be redeemed.
Featured Photo Courtesy: Mint
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