On 8 November 2016, our Prime Minister announced to demonetize Rs.500 and Rs.1000 notes post mid-night. This came out as a big shock to the whole nation. The move was made hoping to curtail the shadow economy and curb the counterfeit cash. While the motive was clear behind the move, it certainly came with some adverse and unexpected consequences. It had a great impact on every sector, especially in the banking sector. The move bought prolonged shortage of cash among people which created a significant disruption in the Indian economy. Considering the banking sector, it not only increased the number of bad loans but also decreased the credit rate. Reserve Bank of India’s (RBI) data showed that on September 30, 2016, the annual growth rate of bank credit was 12.1 % which decelerated sharply to 5.4% in 2017. Demonetization has also negatively affected the lending sector of India.
The slowdown in bank credits has given a boost to the Indian Financial technology lending start-ups. Peer to peer or P2P lending is gaining momentum over bank loans and people are getting comfortable with the online services available for the same. As the banks were and are still burdened by the increased number of bad loans, online lending start-ups got a kick-start. Start-ups like Faircent, Wishful, and Loantap are helping customers get the credit loans for a variety of purposes quickly. These include credit card refinancing, paying medical expenses, personal loans, purchasing expensive smartphones and other electronic gadgets. Because of this, there has been the increase in the number of loans people are taking from these start-ups and this number is expected to increase only. One thing which these start-ups need to take care of is the platform they are using for online lending and payments. A trusted, robust and modern platform that can manage all the lending and payments digitally and is least prone to online frauds is the only requirement to grow for these start-ups. So, using the technologically advanced platform is the key to success for these start-ups.
Post demonetization, people have started using the digital payment methods for paying. According to the reports released by RBI, total credit card outstanding surged from Rs.43, 200 crores at the end of September 2016 to Rs.59, 900 crores in September 2017. This depicts an increase of 39 percent. Mobile wallet payments are also becoming popular among the Indians post demonetization. Other change that the lending sector faced after demonetization is the increase in the demand for online loans. People are happily taking loans form some of the newest lending companies like Bajajfinserv, Capital first etc. Unlike filling in long forms of banks and facing bank’s stringent policies, they prefer going online for taking loans. The benefit of this includes quick approval, lower interest rates, unsecured loans and much more. Nobody has got time to stand in a queue, and wait for days to get approval for the loan in this fast-paced digital era, thus, making online loans their favorite choice.
Demonetization had a negative impact on the lending in rural areas of India. Stats show that in the second half of the FY2017, lending to the rural areas of Punjab, Haryana, Goa, Kerala, and Maharashtra contracted deeply. The lending to rural Maharashtra fell by 9.2% as compared to the previous year’s i.e. FY2016 which witnessed an increase of 5.8 %. The note ban has hurt rural India and the abnormal slowdown in lending can be attributed largely to demonetization.
The major boost that emerged out of demonetization is the increased debit card transactions at Point of Sales Terminal. According to TechSci Research report, “India POS Terminals Market by Type, By End User, Competition Forecast & Opportunities, 2012 – 2022”, India POS terminals market is projected to grow at a CAGR of over 11% during 2017 - 2022. Post demonetization, people shifted towards POS payments as there was a shortage of notes and at present time, every person is quite comfortable using the same. Increase in POS transactions further gave a boost to Merchant Cash Advance Loans (MCA loans). Businesses need additional financing either for growth or for other requirements. Businessmen these days have an alternative to traditional loans which are based on card swipes at POS terminals. MCA is a form of finance where sales from card machines are used to raise loans. Merchants just have to allow their customers to pay via debit or credit cards to avail this type of Advances. MCA loans are repaid by the POS partner on behalf of the borrower. So, increase in POS transactions just gave a big boost to the MCA loans.
Demonetization is the tool to battle inflation, black money, corruption, crime, discourage cash dependency and encourage digitization. The recent study by the directors of RBI reported sagginess in the Bank’s lending even after reducing the interest rates, giving momentum to the new online lending start-ups.