What did banks do with the huge influx of cash during demonetisation?
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As a result of the demonetisation of high-value currency notes in November, people rushed to banks to deposit their money. What did the banks do with this sudden influx of deposits? How did they deploy these funds?
A look at the chart provides the answers. The biggest chunk of the funds was parked in government securities. As the chart shows, the amount invested by banks in government securities was higher than the amount of credit advanced by banks over the period 28 October 2016 to 14 April 2017. (28 October was the last date on which Reserve Bank of India (RBI) data was available prior to demonetisation.)
Banks were in no position to lend for much of this time, preoccupied as they were in taking in the old notes and supplying new ones. Concerns about the health of business units affected by demonetisation also inhibited lending. Parking the funds in government securities provided a convenient and safe avenue.
To check how different this pattern of deployment of bank funds was from the normal, consider what happened in the year-ago period—between 30 October 2015 and 15 March 2016—when there was no demonetisation effect.
As the chart shows, the pattern of deployment of bank funds then was completely different—the lion’s share of banks funds was deployed in credit at the time, with a much smaller portion going into government securities. Indeed, banks invested more in corporate bonds and debentures during that time than in government securities.