INVESTORS BEWARE WITH THE EFFECT OF REMOVING CASH WITHDRAWAL LIMIT ON BANKING SECTOR AND ENTIRE MARKET

Investment in the market is always associated with better analysis, greater courage and larger risk appetite. There are various puzzles like demonetization and trump effect on the economy. Several dynamic factors must be considered before making decisions and all of them seem to be unpredictable. But there exists a leaf of faith in every situation whether it was 2008 recession or the current situation on the basis of which one can derive his decision. And today the removal of cash withdrawal limit from banks after 13 March 2017 can be turned to the same leaf to determine the track of Indian economy.

Post union budget, the biggest decision other than keeping the repo rate unchanged is the removal of cash withdrawal limit from banks which would have its major impact on banking sector and whole economy. India has always been a cash dependent economy. If we divide Indian economy on the basis of business scale, we would observe greater contribution of small and medium sector industries to the economy over the large sector. Less circulation of money and small withdrawal limit have adversely affected small and medium sectors of economy for short term. Removal of withdrawal limit will prove to be a big relief for small sector but this is not going to be very helpful for large sector as the government has put limits on allowable cash expenditure and maximum cash expenditure can be only 10000 per day and in any instance one cannot transact more than 300000 in cash. Well this move would boost the affected trade cycle and would favour cash based business activities. It would increase the investment activities and asset creation by those small and medium sectors. As soon as the investment activities would increase it would enhance business activities, contributes to employment generation and ultimately contributes to better growth of the economy.

Considering the effect on the entire economy it would hit the banking sector most. Banking sector has enjoyed since demonetization, SBI the largest commercial bank in India gained almost 14.3% on the stock exchange with the immediate effect of demonetization. Banks are enjoying low cost funds in the form of current and saving account deposits. They whenever enjoy high liquidity invest it in RBI securities which even earns them more than their operating margin. But in the same line, banks witnessed tremendous fall in their credit business. It has touched to a new low since 90’s. And also they have lost the earning opportunity by waiving transaction fees to promote digital payment. As of now banks are enjoying transaction fee and low cost fund too. But soon this would be yesterday’s thing due to removal withdrawal limit. The move will boost credit business of bank and which means banks would bring the RBI securities back in the market to maintain their liquidity and would also loss their low cost deposits. But all these are not going to happen simultaneously. The immediate effect on the bank would be loss of low cost fund after removing the withdrawal limit. This would put the entire banking sector in pressure for short period as it would take time to streamline the process of credit growth which means investment for longer period is more beneficial. But in the long run it would gain them their lending business and their credit growth in the line of massively developing Indian economy. And the best is going to happen to fastest growing Indian economy with the enhanced contribution from small sector and help economy to return to the same track of pre demonetization development and that too with more intense, fresh and prosperous environment.

All of yours suggestions are warmly welcomed.......