Impact of Demonetization on Banking Sector in India : A Study

Abstract

Everyone is aware of the demonetisation policy of the Government of India, which banned Rs 500 and Rs 1000 notes on 8 November 2016. This had an immediate negative impact on small cash businesses etc. but it had good long-term consequences, it increased tax liabilities and brought out black money of all people and deposited it in banks on a large scale. In rural areas, most transactions are done in cash, so this has had a significant impact on businesses there as well. Although demonetisation affected liquidity, it was a good short-term tool to tackle inflation, black money, corruption and crime, prevent a cash-based economy and facilitate trade. The impact of demonetisation has affected almost every sector of the economy. Its impact on the banking industry is significant as banks act as centers for the distribution of fiat money to meet all social needs. These businesses are the main sources of demonetisation. Demonetisation forced banks to accept payments without charging fees and significantly improved the liquidity position of banks. The literature available after demonetisation was used to prepare the analysis of the present paper. It shows how demonetisation affected the banking industry. It covers the most recent decision of the central government regarding demonetisation as well as its progressive impact on the Indian financial industry.