The demonetisation exercise is expected to bring in substantial funds to public arena in the form of increased deposits to banks, though all that comes in cannot be called black money. The immediate requirement is to ensure smooth transition from old to new notes and to make available more small denomination notes.

The Government and banks are working hard to ensure smooth transition; the immediate inconvenience especially to poor is regrettable. However, once the dust settles down, we all should be prepared for the larger picture.

The new sudden influx of money in to the banking system is going to heavily impact the interest rate scenario and capital adequacy ratios of banks.

With increased deposits which sit on liabilities side of banks’ balance sheets, banks have to hone up their skill sets to look for opportunities to deploy these funds efficiently to protect their spreads and give back decent inflation adjusted returns to depositors. The task becomes so much more difficult in the present context of low credit off take and not much of capital expenditure taking place.

There is an urgent requirement to create opportunities to absorb the huge chunk of deposits.

In the given context, with core sectors, mainly steel not doing well, only highways where there is huge space available, can take up such inflow and the recent declaration by the transport minister Nitin Gadkari that ₹25 lakh crore investments is required in highways and shipping, is a step in right direction.

Otherwise, the carrying cost of these deposits would eat away the banks’ spreads which may result in increased interest rates for borrowers or likely lower interest rates for depositors or both.

The likely increase in advances backed by deposit accretion requires the banks to augment their capital base to maintain the mandated capital adequacy ratios (CAR) which may prompt banks to go for raising further bonds/instruments which qualify as per Basel III norms.

This would entail more equity infusion from the Government into public sector banks to maintain their share holding above 50 per cent to retain the ‘public sector’ characteristic of these banks to pursue social banking requirements.

However, the Government would now be better placed to infuse such equity backed by increased tax revenues from expected conversion of black money to white.

An interesting thing would be whether the banks will be able to pick and choose the right investment avenues in the scarce environment and already saddled with huge NPAs and whether the entrepreneurs have wherewithal to conceive new projects in the absence of black money in the new scenario. Time only can answer these questions.

The writer is vice-president of syndications, SBI US operations, New York. The views are personal

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