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Demonetisation helped formalise savings: Study

Anup Roy/Mumbai 12 Aug 17 | 09:03 PM

Demonetisation may not have lead to a windfall for the government in monetary terms, but it has positively changed the way Indians save and use their excess fund, a staff study by the Reserve Bank of India (RBI) reveals. 


"An important positive impact of demonetisation has been to induce a shift towards formal channels of saving by households," the study, done by RBI staffers Manoranjan Dash, Bhupal Singh, Snehal Herwadkar and Rasmi Ranjan Behera has found. The study does not reflect RBI's official view, but was released on RBI website. 

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The researchers found that during and after demonetisation period, there has been a distinct increase in saving flows into equity and debt oriented mutual funds and life insurance policies. Non-banking financial companies (NBFCs) have also been positively impacted in terms of collections and disbursals, the researchers said. 


The challenge, going forward "would be to channelise these funds into productive segments of the economy."


The mutual funds industry gained handsomely due to demonetisation.

The mutual funds industry gained handsomely due to demonetisation. As interest rates on bank deposits and gold prices fell, investors channelised their savings to mutual funds product. A booming equity markets also helped in lifting the sentiment. Assets under management of mutual fund industry touched an all-time high of more than Rs 17.5 lakh crore by end-March 2017 and further increased to Rs 20 lakh crore at end-July 2017.


Between November 2015 and 2016, net inflow in mutual fund schemes was at Rs 9,160 crore. This rose to Rs 1,69,550 crore during November 2016 and June 2017, out of which April to June quarter saw net inflow of Rs 93,400 crore.


In insurance industry, the premium mobilisation was Rs 1,20,940 crore during November 2016 and June 2017, registering an year -on-year growth of 17.4 per cent. 


However, micro finance institutions shrank their loan portfolio as uncertainties regarding farm debt waivers by various states prevailed. Asset finance and loan giving NBFCs, however, improved their collections substantially in eight months of demonetisation.


"Demonetisation appears to have led to an acceleration in the financialisation of savings," the paper said, adding while greater formalisation of the economy will be aided by the introduction of goods and services tax (GST) and regulations in the real estate sectors. 


The developments will incentivise greater shift from physical to financial savings, while the continuing weakness in real estate activity and moderation in housing prices are likely to further help channel funds away from physical assets into financial savings.


"Finally, the recent deceleration in inflation, as also, inflation expectations, has had the effect of raising real incomes and returns for households, which may provide further impetus to financial saving," the report said. 


Demonetisation led to excess deposit growth in the banking industry, another staff study said. Aggregate deposits grew by 14.5 per cent year-on-year during the period November 11 to December 30 last year, as against 10.3 per cent in the corresponding period 2015, indicating a positive effect of demonetisation.


In nominal terms, excess deposits work out to Rs 3.8 trillion.


"Excess deposit growth in the banking system during the demonetisation period (i.e., November 11, 2016 to December 30, 2016) works out to 4.0-4.7 percentage points," the study found, adding, the excess deposits accrued to the banking system due to demonetisation are estimated in the range of Rs 2.8-4.3 lakh crore. The study estimates the unusual cash deposit in specific accounts, which are usually less active, in the range of Rs 1.6-1.7 trillion.

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