The rise in low-cost cash deposits, courtesy the Narendra Modi government’s demonetisation move, is good news for banks as it will help improve profitability
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There are many moving parts of the government’s currency swap initiative and analysts are still trying to figure out the medium to long-term impact of various aspects.
One of them is the influx of deposits in the banking system. The rise in low-cost deposits is good news for banks as it will help improve profitability.
However, banks are not sure as to how much of the new deposits will actually remain in the system. State Bank of India chairman Arundhati Bhattacharya said in an interview that the bank could retain anywhere between 15% and 40% of the deposits. One of the reasons for such a large range is that it is difficult to distinguish between deposits coming from businesses and individuals.
Clarity on the proportion of deposits that will remain in the banking system will perhaps emerge in the coming weeks with further easing of the cash crunch. But in the end, the banking system is likely to benefit, which will help boost lending and economic activity in the medium term.