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BANKING
&
FINANCE
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INDEX
Topic
Page
1
Demonetization & High
Denomination Bank Notes in India
3
4
Financial News
12
5
Payment Banks
20
6
Banking & Financial News - I
24
8
Banking & Financial News - II
27
9
Johari Window
31
10
Capacity Building in Banks & AIFIs
34
11
Goods & Service Tax (GST)
36
Risk Based Audit
44
12
Enforcement of security Interest &
Recovery of Debt laws &
Miscellaneous Provisions
(Amendment) Bill, 2016
46
14
Digital Banking
49
15
Unified Payment Interface-I
52
16
Benami Transactions
55
17
Brexit
55
18
Indian Accounting Standards
62
19
Solvency & Bankruptcy Code, 2016
65
20
Unified Payment Interface-II
72
21
Budget Terminologies
74
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DEMONETIZATION OF HIGH DENOMINATION BANK NOTES
IN INDIA
What is Demonetization?
Demonetization is a radical monetary step in which a currency unit is declared
as an invalid legal tender. This is usually done whenever there is a change in the
national currency of a nation. Such a step is especially taken to curb the menace
of counterfeiting, black money and money laundering. A recent example is
demonetization of Rs. 500 and Rs.1000 denomination currency units in India.
Demonetization is the act of stripping a currency unit of its status as legal
tender. The old unit of currency must be extinguished and replaced with a new
currency unit.
The move was enacted under the High Denomination Bank Note
(Demonetization) Act, 1978. It was termed as "an Act to provide in the public
interest for the demonetization of certain high denomination bank notes and for
matters connected therewith or incidental thereto.
Reasons for Demonetisation
a) India remains a cash based economy hence the circulation of fake Indian
currency notes continues to be a menace. In order to contain the rising incidence
of fake notes and black money, the scheme to withdraw has been introduced.
b) The move is estimated to scoop out more than Rs. 5 lakh crore black money
from the economy. As per the Govt. the shadow economy, i.e., meaning people
do not account for their income and do not pay taxes on it, is about a quarter of
India's GDP. As per Income Tax department data only 1% of India's population
pay income tax.
c) To lower the cash circulation in the country, this is directly related to corruption in
our country.
d) The fake notes are used for anti-national and iIIegal activities. High denomination notes
have been misused for terrorism finance.
IMPACT OF DEMONETIZATION ON VARIOUS SECTORS
The Prime Minister‘s decision to scrap high value notes of RS.500 and Rs.1,OOO has
created a shortage of cash in the system, leading to a lot of discomfort for the
general public and businesses. Also, since there is a shortage of newly printed
Rs.500 and Rs.2,000 notes, the situation has worsened. The move has also led to
a shortage of lower denomination notes such as RS.100 and Rs 50 that are still
legal tender, as people have taken to conserving whatever cash they have in
hand. The demonetization by government has affected various sectors of the
economy in several ways such as:
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STOCK MARKET
As a combined effect of demonetization and US presidential
election, the share market indices dropped to an around six-month low in the week
following the announcement. The day after the demonetization
announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50 plunged
by over 541 points. By the end of the intraday trading section on 15 November
2016, the BSE SENSEX index was lower by 565 points and the NIFTY 50 index
was below 8100 intraday.
AGRICULTURAL SECTOR
» India's agriculture sector was widely expected to have a robust year owing to
good rainfall after two years of drought and the sector was pegged to grow
by about 4% in the current fiscal.
» The Government's demonetisation move which has swept away 86% of currency
in circulation, has badly hit farmers leaving them without cash just ahead of the
Rabi sowing season.
» Due to restrictions placed on bank withdrawals after demonetisation
announcement has badly hit the farmers ahead as they are left with very little cash
to buy seeds and fertilizers.
> In addition, the RBI has also banned the exchange of old notes at co-operative
banks, which farmers visit more often. It is estimated that more than 40% of small
and marginal farmers take crop loans from cooperative institutions.
DEMONETIZATION OF HIGH DENOMINATION BANK NOTES
IN INDIA
BANKING
As per RBI Rs. 12.4 lakh crore of olds notes scrapped have been deposited in Banks till
Dec 10 in the form of old Rs.500 and Rs.1,OOO
banknotes had been deposited in the banking system and about
500 billion rupees had been dispensed via withdrawals from
bank accounts, ATMs as well as exchanges over the bank
counters.
The State Bank of India reported to have received more
than Rs.300 billion in bank deposit in first two days after
demonetisation. A spike in the usage of debit card and credit
card post demonetisation was also reported.
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TRADE:
By the 2
nd
week after demonetisation of Rs.500 and Rs. 1,000
banknotes, E-commerce co's saw up to a 30 decline in cash
on delivery (COD) orders. Several e-cornrnerce companies
hailed the demonetization decision as an impetus to an increase
in digital payments. They believe that it would lead to a decline in
COD returns which is expected to cut down their costs.
The demand for point of sales (POS) or card swipe machines
has increased. E-payment options like PAYTTM and PayUMoney
has also seen a rise.
INCOME TAX RAIDS AND CASH SEIZURES
The Finance Ministry instructed all revenue intelligence
aqencles to join the crackdown on forex traders, hawala
operators and jewelers besides tracking movement of
demonetised currency notes.
IT departments raided various illegal tax-evasive businesses
in various cities that traded with demonetised currency.
The Enforcement Directorate issued several FEMA notices to
forex and gold traders. It also raided several forex
establishments making back dated entries. Large sum of cash
were seized in different parts of the country.
EVASION
In India, most transactions including some high
value ones such as jewellery sales take place using cash rather
than electronic payments, allowing for the utilization of black
money and hiding of transactions from tax authorities. In Gujarat
and Delhi and many other major cities, sales of gold increased
on 9 November with an increased 20 to 30% premium surging
the price as much as Rs.45,000 from the ruling price of
Rs.31 ,900 per 10 grams.
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MULTIPLE BANK TRANSACTIONS
There have also been reports of people circumventing the
restrictions imposed on exchange transactions and also
attempting to convert black money into white by making multiple
transactions at different bank branches.
MUNICIPAL AND LOCAL TAXES
The use of the demonetised notes had been allowed by the govt.
for the payment of municipal and local body taxes. This led to
people using the banned Rs.500 and Rs.1000 notes to pay large
amounts of outstanding taxes as a result, revenue collections of
the local authorities have jumped due to the demonetisation.
POSITIVE EFFECTS OF DEMONITISATION
The immediate impact of Demonetisation is surely hampering the
growth and will continue to do so in the near term and will also
impact India's growth for the coming two quarters but will have
positive long lasting effects. The question that arises is why
demonetisation was required at this point of time. There are
certain pros and cons of demonetization
.
CHECK ON CORRUPTION:
One of the biggest benefits of
this move is that it is going to drastically affect the corrupt
practices. People who are holding black money in cash will not
be able to exchange much as they would be in a fear of getting
penalized and prosecuted by the authorities.
NON SUSTAINABILITY OF TERRORISM & SMUGGLING
Enemies of the country which are involved in counterfeit
currency and terrorism will not be able to continue it further for
quite some time at least. The smuggling of arms and dealing with
the terrorist will not sustain further as all of the money will be on
record now.
IMPROVEMENT IN BANKING SYSTEM
The banking system will improve as it will slowly head towards
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a cashless society. Cashless society will increase credit access
and financial inclusion.
The existing white money of people will be known to the
government and it will remain with banks so that it can be put on
loan, and interest can be generated from it (though interest rates
would fall) with a corresponding fall in Inflation.
Further Banking System will get a boost, as more than Rs 7-8
lakh crore base money (new legal money) will enter the system.
LESS RISK & COST INVOLVED IN HANDLING CASH
The risk and cost of cash handling will be reduced due to
more use of plastic money and online payment systems as soft
money is safer than hard money. It will also reduce government
liability.
Since every note is a liability for the government, the old
currency will become worthless for those people, who choose
not to disclose their income. Thus, this will extinguish
government‘s liability to that extent.
REDUCTION IN FISCAL DEFICIT & TAX AVOIDANCE
It is expected approximately Rs 5 lakh crore may come to the
government in the form of extinguished RBI liability, taxes and
penalties. This amount is enough to take care of India's entire
fiscal deficit for one year or more.
Search and Seizure activities of the IT Department will also
rise to curb such malpractices. Limits have already been
prescribed for reporting to the IT Department those bank
accounts in which excess cash deposits are being made in this
50-day window (Rs 2.5 lakh in case of individuals and Rs.12.5
lakh in case of firms).
Importantly, in the longer run, tax and interest rates on loans
are expected to come down as higher income tax collections
arising from better compliance would offer scope to reduce rates
over the long term. This, in turn, will drive up disposable income.
This can give a positive impact on consumption demand in long
term.
NEGATIVE EFFECTS OF DEMONETISATION
The liquidity squeeze caused by demonetisation will be negative
across sectors with high level of cash transactions. Real estate,
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jewellery, retailing, restaurants, logistics, consumer durables and
luxury brands, cement and some segments in retail/SME lending
space will be facing short term instability. Those companies with
high level of debt will face more pressure and can face loan
defaults.
INCREASED REPLACEMENT COSTS OF CURRENCY
There will be an added replacement costs of currency owing
to increased cost of operating A TMs as they need to be refilled
more often and also it will be a huge burden on banks.
Initially, it is very difficult to create a cashless society as more
than 50 percent of Indian population is not well versed with card
transactions. Also for these Initial months, it will be very difficult
to make cash transactions of a higher amount.
EFFECT ON TRADE AND CONSUMPTION
Since our economy is heavily dependent on cash, as only less
than half the population uses banking system for monetary
transactions, demonetisation has hit trade & consumption hard.
With people scrambling for cash to pay for goods and
services, the move is likely to take a big toll on the country's
growth and output during the current fiscal.
Consumption makes up for around 56 of India's GDP, hence
a drop in spending will pull down growth. The current step could
also lead to behavioral changes in households' savings and
their consumption pattern.
The consumer goods sector, which has reported solid growth
so far, was the weakest performer this month. This suggests that
consumption - the sole growth driver, has been hit rather sharply.
Growth in cash-intensive sectors such as real estate,
construction and FMCG is likely to take a hit in the short term as
consumers are deferring purchases. However, over the medium
term, there would be benefits through higher government
spending and greater financial inclusion. Also, the movement of
household savings from physical to financial will help boost
growth.
The near-term fall in growth on account of spending slowdown
could push inflation down. Also, an increase in fiscal headroom
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will allow the government to maintain fiscal discipline, which in
turn will support inflation target in the medium term.
MANUFACTURING
In November, India's Purchasing Managers' Index (PMI) - an
economic indicator of the manufacturing sector that tracks new
orders, inventory levels, production, supplier deliveries, and the
employment environment, stood at 52.3 which is two points
lower than the 22-month high of 54.4 recorded in October. A PMI
of less than 50 indicates a contraction in the economy.
PMI data for November showed that the sudden withdrawal of
high-value banknotes in India caused problems for
manufacturers, as a cash shortage hampered growth of new
work, buying activity and production. Experts now believe that
the impact of demonetisation on the manufacturing sector will
continue through December, too.
SERVICES SECTOR HIT HARD
Services sector comprises areas such as trade, hotels and restaurants, transport,
communication, finance, insurance, and real estate, among
others, and accounts for 60% of India's $2 trillion GDP and it has
been hit hard due to demonetization drive in the economy.
RURAL CONSUMPTION REMAINED SLUGGISH
a) India's rural economy which services 68% of the
population and was the driver of India's consumption boom
between 2007 and 2012, has seen sluggish demand and the
sluggish rural consumption is staring at a further dip due to their
higher dependency on cash transactions. Discretionary spends
will see a bigger impact in this geography.
b) Mandis may experience a shortfall of cash for the purchase of
daily essentials including fruits and vegetables; leading to further
problems for farmers and having a domino effect on their ability
to purchase. It could take at least a few months before consumer
spending is finally back on track.
THE AGRICULTURE SECTOR
The agriculture sector will bear the brunt of demonetization as
farmers are finding it tough to sell their produce in the APMC
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(agricultural produce marketing committee) markets. Therefore,
despite a good harvest, there is unlikely to be a commensurate
improvement in rural demand.
SENSEX AND FOREIGN INFLOWS
Since demonetisation, the Sensex has fallen by around 5%
while foreign portfolio investors (FPls) withdrew around
Rs.37,300 crore in November, the highest since June 2013. FPls
had withdrawn Rs.12,140 crore in October.
Foreign investors have pulled out funds from capital markets
due to fears of rate hike by the US Federal Reserve in
December, uncertainty over US ties with emerging markets post
(the) Donald Trump victory, and concerns over the impact of
demonetisation and GST on economic growth & corporate EARNING.
INDIA MOVING TOWARDS CASHLESS ECONOMY
It won't be wrong to say that India is moving towards more
cashless economy as data from RBI reveal that bank branches
increased at 5% per year, but automated teller machines
(ATMs), debit cards and card-swiping machines have doubled in
four years and online transactions have grown 20 times in six
years to 2016 and this process is likely to be greatly boosted by
demonetisation.
According to RBI data, currency in denominations of Rs 500
and Rs 1,000 have increased 50% over three years (from Rs 9.6
lakh crore in 2012-13 to Rs 14.1 lakh crore in 2015-16) while
India's gross domestic product (GDP) increased 22, and per
capita income rose18 over this period.
With the base created by bank accounts linked to Aadhaar,
the national identification system, and the upcoming Unified
Payments Interface, which will facilitate payments through
mobile phones linked to bank accounts through a unique
number, demonetisation will help speed the transition of a
predominantly cash economy to a cashless one.
The number of debit cards in India more than doubled
between 2012 and 2016. Over the same period, point-of-sale or
PoS machines - the credit I debit card-swiping machines in
hotels and shopping malls, also more than doubled.
Online transactions through the National Electronic Fund
Transfer, popularly known as NEFT, rose from Rs.4 lakh crore in
2009-10 to Rs 831akh crore in 2015-16, a 2000 rise.