Study of Business Finance of Banking in the Post Demonetization Scenario
Zemeer Nayar Paddikkal, Charisma University,
Senior Vice President for Enrollment Management, Saint Tomas University,
Faculty of Management, Central America, USA.
E-mail: zemeer@gmail.com
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Abstract
Government of India took a historic decision on Nov.16-2016 where in currency notes of `1000 and `500 (specified bank notes or SBNs) valued at `15.4 trillion and constituting 86.9 per cent of the value of total notes in circulation, were demonetized. Demonetization led to several changes for the financial sector affecting financial operations of business immediately, which this paper aims to analyze .Business organizations faced cash crunch and lending finance squeeze .If Banks could have made policy change and alternative arrangements the situation could have been averted.
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Key Words: Demonetization, financial operation, lending finance, cash crunch
1. Introduction
Demonetization have not been a popular global phenomena but it has been seen in advance countries too .Its aim scope and effects vary where ever it has taken place. We can see demonetization has witnessed some success, few failures and some partial success. In case of India it was observed that the Growth of bank credit fell to a multi-decade low of 5.1% for the fortnight ended December 23, aslo drying up of demand in the last two months of the year saw businesses cutting down on borrowing.This was due to a clear cut policy and administrative steps shortcomings .When we see Data released by RBI it showed that as of December 23, bank lending to businesses, individuals and the farm sector stood at Rs 73.48 lakh crore, an increase of 5.1% over the same period of last year.{10} At 5.1%, credit growth slide reaching a point of no return' A slowdown to 5.1% in December seems to indicate that credit growth is reaching a point of no return in this financial year. While there is marginal growth year-on-year, on a year-to-date basis (from April 2016) credit has declined in many sectors," said SBI chief economist Soumya Kanti Ghosh.Year-on-year credit growth in the previous fortnight ended December9 was also a low 5.76%. DK Joshi, chief economist at Crisil, the country's leading credit rating agency, attributed the drop in credit growth to the disruption caused by demonetization and categorically announced "Otherwise there was no reason for credit growth to fall. The economy was looking up, there was the pay commission hike, there were good rains, and some interest rate cuts were being passed on to borrowers, which would have created more demand for credit," .He said that the second half of the year was when banks advance the bulk of their loans and slowdown at this time will hurt growth targets.
"Demonetization has really hurt activity across all corners of the economy. Purchasing Managers Index (PMI) data shows that both manufacturing and services have contracted in December. Thus overall economic scenario witnessed contraction. According to Jefferies, India an investment bank, credit growth could slip to 6% in FY17. "Deleveraging of corporate balance sheets, halt in fresh capex, and increased access to corporate bond market have led to a negative growth in banks' credit to corporate”. It is evident that RBI numbers show that corporate loans are shrinking. Since end-September bank loans have shrunk by Rs 1.72 lakh crore (2.3%).{9} The sectors which saw a slowdown or drop in credit include infrastructure, food processing, chemical and chemical products, all engineering, textiles and basic metal and metal products.
On the other hand Demonetization has its supporters.There are a big chunk of people and organization who saw positive aspetca of the demonetization steps. While industrialists and corporate chiefs (Ratan Tata, Mukesh Ambani, K.V. Kamath and Deepak Parekh, to mention a few) favor the move, economists (including Nobel laureates Amaryta Sen and Paul Krugman, among others) are critical. “The clan of economists has spoiled the party [with] their estimates
of how output will be affected as spending has stopped, manufacturing hit and several workers laid off. The net result can be a fall of between 0.5% and 2% in GDP,” says online news channel Firstpost.
Banking sector find demonetization as a great move. There will a boost in the financial assets savings as India is moving towards being a cashless economy. Margins are being impacted as there are lot of deposits and limited access to lend. The credit deposit ratio is seen to be in unfavorable state. There is expected to be positive margins only if capital adequacy spikes up. The best and available source to deploy huge flow of deposits is by G-Secs. However, this will create a temporary dip on the bond values.
Based on the above opinions it was pertinent if before Demonetization or as soon as there of , Banks have to be ready to compromise on the lending rates to attract customers for credit purposes and as part of these banks such as SBI, PNB and other banks have slashed their lending rates on housing loans. In the near future, a dip in lending rates is expected to be seen on all types of loans. This will make easier for individuals get loans at affordable rates. Banks are said to be making profits with the help of demonetization. When we analyze on line transactions we find that irrespective of the different available sources of e-wallets, the banking sector is still being involved into many online transactions. This helps in making the financial transaction controlled and thus the retail payment system is a great way of adding additional source to the banks.
Never the less adverse impact too was noticed following demonetization as the mpact of Demonetization on the Financial Sector (Article 8- RBI Bulletin November (2017) {10}”Impact of Demonetization on the Financial Sector weeks immediately prior to and the lowest level of CIC witnessed after demonetization), total CIC declined by about `9 trillion.”There are mixed impact of demonetization affecting various sectors in the economy.
Banks themselves may not feel the pinch but what about its customers and businesses who are attached to it? It is here that this paper tried to analyze.
2. Literature Review
According to Fatima Asra (2017), demonetization have a negative impact on inflation.
Consumer spending activity almost stopped. “Consumers are refraining from making any purchases except essential items from the consumer staples, healthcare, and energy segments.
Activity in the real estate sector, which includes a lot of cash and undocumented transactions, slowed down significantly, Metropolitan and Tier 1 cities reported up to a 30% fall in house prices”-{3} Raj Som (2018) argues in favor of demonetization. According to him “It is imperative to evaluate the short run and medium-term impacts that such a shock is expected to have on the economy”{12}. This paper elucidates the impact of such a move on the availability
of credit, spending, and level of activity and government finances. There is no detail and exclusive on customers woo except the impact on general economy after demonetization.
Mukherjee. (2016) {8} focused on the impact of demonetization on the credit availability, government finance, spending and levels of various activities. The researchers stated that in a very short period there would be more serious affect on persons earning income in cash as well as spending in cash. They say “Unorganized sectors will much adversely effected in very short run time. In case of short term effect having complete replacement, an immense strengthening of informal sector credit market would be seen in the rural market and there would be adverseaffect on construction sector” but the medium term impact would produce results in terms of enhancements in deposits in the economy. While Mohd. (2016) {7} studied about the significance as well as challenges of demonetization of currency notes.
According to researcher Sunita ( 2014) {9} on earlier demonetization finds its reasons as the enhancing trade deficit, 1965’s war between India and Pakistan, gulf war, political as well as economic stability, dwindling foreign exchange reserves, withdrawn of FII’s (Foreign Institutional Investors) and strengthen of dollar. Deodhar in his research study visualized the concept of black money and demonetization including its form as well as the consequences and role of demonetization as a mechanism to get tackle on black money. The researcher also mentioned about some principles to tackle black money. Further to it Nandakuma C.J.r, president of Bank Employees Federation of India said "After the withdrawal of old high denomination notes, there have been an increase in deposits by 15% from the last financial year when it was in single digits but advances have fallen to 5.67% this quarter where it was growing at a rate of 14% earlier. There is no scope of advances now. It might lead to a severe economic crunch which could make the scenario catastrophic,"
There is no clear cut facts available in the literature review regarding cash crunch and business finance. This gap is the main area where this paper tried to analyze
3. Research Methodology
Problem statement: How bank can meet the customer s needs of cash and business finance following Demonetization or it could have been minimized with policy and administrative restructuring.
The empirical approach to analyze the problem was considered to be the most appropriate methodology in this paper .This paper is based on the primary source of data therefore views of customers of Banks after proper selection (both retail and business) were taken into consideration. It helped to analyze the problems with whom it mattered (customers) rather than who caused (Banks).
Business identified as having need of finance were selected as potential customers for this study 400 companies we contacted, 98 ultimately completed our questionnaire. Because some
companies did not provide data on both a successful and an unsuccessful event, the sample consisted of 96 successes and 76 failures, for a total of 172 events.
The 98 responses formed the initial basis for this study. Next, 106 other companies had failed to respond surveys were added to the list, for a total sample of 204 companies. Of the 204 companies contacted to participate in the study, 88 ultimately agreed, a response rate of 43.33 percent. Events were classified as successes or failures based on participant responses.
The total of 150 events is adequate for statistical purpose, although result from a larger sample may have been more widely applicable.
4.
Data Analysis
4.1 Hypothesis of the Study
4.1.1 Lending Reduction (1st Hypothesis)
The first hypothesis of this study is “Reductions in the lending” Shortly after the demonetization event that were relatively large and arbitrary would be correlated with unsuccessful events.
In the sample surveyed, Reductions lending took place following 70 of the application events (46.67 percent) of these 70 events, 32 were successes and 38 were failures.
Table 1: Timings of the Reduction in the lending Scenario Timings of Reduction N Success Failure
0-6 month 42 8 34
>6 months 46 24 22
Total 88 32 56
Note: The total in the ‘N’ column incorporates some events that used more than one step for the reduction.
Table 2: Timings of the Reduction in Cash Availability Timings of Reduction N Success Failure
0-6 months 22 0 22
>6 months 54 24 30
Total 76 24 52
Note: The total in the ‘N’ column incorporates some events that used more than one step for the reduction.
Firms that needed lending within six months of the Demonetization event were more likely to experience failures than those that needed the finance more than six months after the event.
In fact, 81 percent of the cases (34 out of 42) were failed events. The difference was significant at the 0.01 level. Chi squares were 5.206 and 7.145 for hourly and exempt employees respectively.)
With respect to the extent of the reduction (Tables 3 and 4), when more than 10 percent of the target was dropped, 84 percent of the events (22 out of 26) were reported as failures.
Conversely, the event was nearly twice as likely to be a success when 10 percent or less of the
needs eliminated (only 16 out of 44, or 36 percent, were reported as failures). (This differences between and failure was significant at the 0.01 level chi square of 7.66)
Table 3: Percentage Reduction in Financial Needs Reduction in Workforce N Success Failure
0-10 44 28 16
11-50 26 4 22
Total 70 32 38
Table 4: Percentage Reduction in Lending Reduction in Workforce N Success Failure
0-10 54 30 24
11-50 16 2 14
Total 70 32 38
Reduction in the lending that were affected in more than one step were more likely to be associated with failure than when only one cut was made. In fact, only 11 percent of success got various reductions, while 48.57 percent of the failures followed approach.
This finding supports the first hypothesis of this study, that relatively large and unilateral lending reductions undertaken shortly after the demonetization event would be positively correlated with unsuccessful events.
4.1.2 Unplanned situation (2nd Hypothesis)
The second hypothesis of this study is “Higher levels of unplanned situation would be positively correlated with unsuccessful events”.
Of the 150 lending events in the sample, 84 cases (56 percent) experienced unplanned situations (Table 5). The difference in the incidence of unplanned situation in successes and failures was statistically significant at the 0.01 level (a chi square of 6.692). That is unplanned situation was associated with lending failure. Furthermore, in the failures a higher proportion of lending application lost, with an average of 49.42 percent versus an average of 11.94 percent in the successful group.
Nearly 79 percent of all events in the sample experienced unplanned situation among business in the target organizations. While this pattern is quite high for both successful and unsuccessful events, a much higher proportion of failures experienced a turnover (Table 6).
(This difference was significant at the 0.01 level) In addition, in failed lending events the average failure rate was more than twice that of the successes (12.48 percent versus 5.67 percent).
Table 5: Incidence of Unplanned Situation
Reduction in Workforce N Success Failure
unplanned 84 36 48
No unplanned 66 48 18
Total 150 84 66
Table 6: Incidence of Unplanned Situation
Reduction in lending N Success Failure
Lending squeeze 118 54 64
No lending squeeze 32 30 2
Total 150 84 66
While the incidence of lending and unplanned situation was higher than anticipated, the fact that both provide statistically significant evidence of a difference between success and failure lends support to the hypothesis that higher levels of unplanned situation would be positively correlated with unsuccessful events.
4.1.3 Restructuring (3rd Hypothesis)
The third hypothesis of this study is “Restructuring activities not undertaken soon after the demonetization event would be positively associated with unsuccessful events”.
To test this hypothesis, three types of restructuring activity were investigated: changes in the policy structure that centralized or decentralized key functions or reduced the layers of existing regulations; changes in the policies and procedures of the lending; and actual finance for the needy firm. Of the 150 events in the sample, 26(35 percent) reported no change in the policy of the target following the Demonetization event. Table -7 illustrate that in failed events the incidence of changes to the policy structure of the target was more than three times as high.
(This difference was found to be statistically significant beyond the 0.01 level, with a chi square of 17.506). As to the timings of the regulations, Demonetization event categories reported a range from changes undertaken immediately to changes undertaken twelve months after the event. On average, lending changes in the successes were initiated approximately six months following the events. In the reported failure, changes were not undertaken sooner, at an average of 3.4 months following the event.
Table 7: Incidence and Timings of Policy Change
N Success Failure
Change in policy 52 12 40
No change 98 72 26
Total 150 84 66
Timing of change(average) --- 6 Months 3.4 Months Timing of change (mode) --- 6 Months 2 Months
Failed events were more than twice as likely to have undertaken a centralization of key functions in policy change In addition, only in successful events were steps taken to decentralize key functions in policy change
In 92 (61.33 percent) of the demonetization events, there were changes in the policies and procedures. As table 8 illustrates, failed events were represented almost one and a half times as often as successes (this differences was found to be significant at the 0.01 level). In addition, on average in successful lending & finance events acquires tending to wait twice as long before initiating the change in the target.
Table 8: Changes in Policies and Procedures of Banks
N Success Failure
Change undertaken 92 38 40
No change 58 46 26
Total 150 84 66
Timing of change (average) --- 6 Months 2.41 Months Timing of change (mode) --- 6 Months Immediately
. Table 9: Incidence and Timings of Actual Finance Made
N Success Failure
Actual Finance 90 36 54
Non Reported 60 48 12
Total 150 84 66
Timing of happening (average) --- 6.39 Months 3.74 Months Timing of happening (mode) --- 6 Months 2 Months
Affecting 05% 40 22 18
Affecting >5% 50 14 36
Successes and failures were also associated with the number of actual finance made in a single event. While approximately 50 percent of the successes reported more than one type of finance in a single event, 77.78 percent of the failures reported no changes. Banks preoccupation dominated in both successful and failed events. They took place in 57.14 percent of the former and 41.67 percent of the latter. Reduction in public hours and office closure, were slightly more prevalent in failures (58.33 percent) than in successes (42.86 percent)
The changes that were not initiated relatively quickly after the Demonetization event were more likely to be associated with a reported failure. These findings, therefore, support the third hypothesis of this study.
5. Conclusion (Remarks)
All the Hypothesis and its respective results show that there are certain factors related to cash and lending failures after demonetization .There could be certain factors related to its success. Therefore few precautions were required to be taken which ensure success of lending and cash flow for the businesses and few factors needed to be taken care in order to avoid failures .The Study further reveals that in failed events there were most likely to be lending reduction based on unilateral decision of the Banks and involving more than 10 percent of the business. It is to be noted that alternate resources for the change was not initiated in the process, the greater was the chance that the event would fail. As such it is suggested that the Banks when avoid these elements are most likely to achieve towards the accomplishments of a successful demonetization effects for lending and financial operations of business. Their customer’s twin problems (both retail and business)” cash crunch” as well as “business finance” could have been tackled in an appropriate manner.
Limitations However findings do not suggest that the Banks should have alternative lending support to the business starting from the demonetization There could be many situations where changes may require to ensure synergies of the effects of demonetization. The more important is the mannerism that is the manner in which changes are made. This would differentiate between success and failure of demonetization as such an increase understanding of the issues involved demonetization transitions and integrations is a crucial step towards addressing the high incidence cash and lending failures.
References
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