The government set out to tame a demon called “black money” through its “earth shaking” demonetisation drive. Tremors from this move have been felt in various sectors of the economy. The velocity of flow of money is related to economic growth. Free cash flow leads to smoother transactions, which directly impacts the demand for goods, services, labour and entrepreneurship. Ofcourse, it does have a flip side of leading to a shadow economy but demonetisation was undertaken to quash it.
When the government decided to pull the plug on the fated Rs. 500 & Rs. 1000 notes, it literally sucked out 85% of the free flowing cash of the economy. This acted as a bottleneck to all investment plans. As per data released by Centre for Monitoring Indian Economy (CMIE), new investment proposals worth Rs. 1.25 Lakh Cr were observed in the quarter ending Dec 2016, as against Rs. 2.36 Lakh Cr being observed in the preceding nine quarters. Clearly, demonetisation hit the pace of announcements of new investment proposals.
Demonetisation and Home Loans
In recent times, the property market has been struggling with towering unsold inventory, flat prices and slow growth rate. Demonetisation is a serious blow to this sector. With the sector being stripped of cash, the popular consumer mood is that property prices must correct. There has been a dual impact on this market.
Builders are not inclined to inject fresh funds into new projects. Consumers are holding off from investing in property as they expect the prices to fall. In other words, there is a slack in investments & demand for homes. This is in turn has trickled down to a fall in demand for home loans.
A lot of people consider property as a long term asset class and make investments in the sector hoping to receive long term gains. For example, some people buy a second home hoping to sell it off at a later stage in life and using that fund during retirement days. Due to the expectation that prices of residences should move southwards in the near term, people are not applying for any second home loans.
Demonetisation and Personal Loans
Post demonetisation a lot of businesses have been hit hard as cash literally dried out from economic circuits. Spending dropped hugely; people began to hold back expenses barring those that were absolutely necessary.
Numbers speak for themselves. For example, data on Indians taking a holiday every month show that there is a marked decline in the number of Indians that went on a holiday in November and December of 2016. Demonetisation can easily be cited as the primary reason behind it.
People seek personal loans primarily to meet a personal financial requirement such as wedding expenses, funding a holiday, buying household goods, etc. Those who have to consolidate debts or attend to a medical emergency are still applying for personal loans, but there has been a considerable drop in a demand for them. Those expenses that are avoidable or can be pushed into the next quarter are being put off. Besides this, people are also hoping the rates of personal loans will also decline. They are holding their demand to take advantage of lower interest rates in future.
Demonetisation and Banks
Banks have borne the harshest brunt of demonetisation. Amidst the confusion and chaos surrounding the impact of it, banks have become more stringent in disbursement. With a surge in deposits in bank accounts, banks have started to cut down FD rates. As we know it, lending rates are also a function of deposit rates. With a fall in deposit rates, there should be a subsequent decrease in lending rates as well.
SBI has set the stage by being the first to initiate a cut in home loan rates by upto 90 basis points. Others are expected to follow suit.
So, Has Demonetisation Failed?
Free flowing cash makes furrows which makes the economy more fertile. One can say cash is the energy and economy is a circuit. Without energy the circuit will not light up.
Whether demonetisation has been successful in shaking out the intended “black money” only time will tell. Until then let us refrain from having a myopic view of the approach. The impact of this bold move will be realised in the long term.
In the backdrop of scrapping old notes, India today stands at the threshold of a digital revolution. The current slack in demand for loans is a temporary phase and it will pick up in due course.
Your email address will not be published. Required fields are marked *
Nice Article. There is always pros and cons of every aspect. Indian Cu ...
Thanks for finally writing about >Why Indian women fall short on cr ...
Thank you for sharing your infօ. I reɑlly appreciate yⲟur efforts and ...
Daily Tips to stay Credit Healthy
© All Rights Reserved at Credit Sudhaar