Mains Paper 3: Indian Economy and issues relating to planning, mobilization of resources, growth.
Prelims: RBI, Demonetization.
Mains level: The news card discusses RBI’s study titled ‘The impact of demonetization on financial sector’ which further highlights that MFIs, NBFCs are yet to recover from the impact of demonetization.
The RBI’s study on ‘The impact of demonetisation on financial sector’.
- Disbursals by micro-finance institutions (MFIs), which plunged by over 71 per cent after demonetisation of Rs 500 and Rs 1000 notes, are yet to bounce back into the positive territory, a Reserve Bank of India study has said.
- However, the study attributed the decline to farm loan waivers by various state governments.
- In the case of MFIs, however, disbursals continued to contract in comparison with the monthly average of disbursals during April-October 2016 in view of the uncertainty surrounding loan waivers by state governments.
- While the average monthly disbursals by MFIs declined by 71.4 per cent in December.
- Disbursals gradually improved but stayed down in June 2017, the study said.
- However, collections by MFIs fell during November 2016-February 2017 vis-a-vis April-October 2016, but witnessed an improvement in March, May and June 2017.
- Growth in collections (i.e., repayments of loans) of asset finance firms and loan firms during November 2016-June 2017 increased over the monthly average collections during April-October 2016.
Trend of Bank Credit to NBFCs
- Bank credit to NBFCs decelerated from 5.1 per cent (y-o-y) in October 2016 to 1.3 per cent in November 2016.
- However, it improved to 10.9 per cent in March 2017.
- In terms of the returns submitted by the reporting NBFCs, loans and advances by NBFCs rose broadly at the same rate in the year ending March 2017 (16.4 per cent) against FY16 (16.6 per cent), the RBI study said.
- During demonetisation and the subsequent period, there has been a distinct rise in saving flows into equity/debt oriented mutual funds and life insurance policies.
- Apart from this, NBFCs seem to have recorded improvement in collections and disbursals.
- Demonetisation-led increase in CASA deposits also led to significant improvement in transmission to bank lending rates during the post-demonetisation period.
- The challenge, going forward, would be to channel these funds into productive segments of the economy and expand the footprints of the digital economy, which has undergone a sharp increase, another important consequence of demonetisation.
- Fake notes detected per million pieces of notes processed at the currency chest level was 7 pieces for Rs 500 denomination and 19 pieces for Rs 1000 denomination.
- At the RBI’s currency verification and processing system, there were 2 fake Rs 500 notes and 6 fake Rs 1000 notes for every million pieces processed during 2015-16. These rose to 6 pieces and 12 pieces, respectively, during the post-demonetisation period.
- As compared to 2015- 16, 12 clusters for Rs 500 denomination and 14 clusters for Rs 1000 denomination showed a statistically significant higher rate of fake note detection during the post-demonetisation period.
- These findings imply a significant pick-up in the rate of fake notes detection at the Reserve Bank level in the post-demonetisation period as compared to a year ago.