Bank deposits to decline once withdrawal norms ease: Moody’s

Moody’s estimates are based on the assumption that the role of cash will not change materially in the near term in India’s economy


Moody’s said the trend of significant inflows will continue for the next three-four weeks. Photo: AFP
Moody’s said the trend of significant inflows will continue for the next three-four weeks. Photo: AFP

New Delhi: With about Rs4 trillion coming into the banking system within a week after demonetization, Moody’s Investors Service on Wednesday 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 8 November announced demonetisation of Rs500 and Rs1,000 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 three-four 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.

Also read: Demonetization may help banks turn profitable in third quarter: CLSA analyst

In order to ensure sufficient cash availability in the system, people have been allowed to withdraw only Rs24,000 in a week through cheque. Besides, the daily withdrawal limit from the recalibrated ATMs stands at Rs2,500.

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, Rs500 and Rs1,000 notes account for around 86% of the existing currency in circulation and around 9.5% of the gross domestic product (GDP). Of the Rs14 trillion of high-denomination notes, an estimated Rs4 trillion has come into the banking system since 8 November.

The withdrawal of these high-value notes may provide a strong impetus to greater use of the formal financial system—the banking system—for the intermediation of commercial transactions, especially in the retail segment, Moody’s said.

The government move has meant that a large proportion of the population will have to access banking channels at least once, so as to convert their existing holdings into the new legal tender.

Moody’s said studies have shown that first-time users tend to keep using the banking system once they initiate the process. Therefore, we expect a material proportion of the first-time/very infrequent users to become more sticky customers of the banks.

“This development should also benefit the banking system in the form of a higher level of low-cost deposit,” it said.

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