Impact of Demonetization on Corporate Finance

Last updated on March 1st, 2021 at 08:48 am

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While we all have been led to believe that demonetization seemingly has had little to no impact on Indian companies, during the December quarter. A slightly closer look reveals a more detailed and slightly different picture. Let’s talk stats, the Centre for Monitoring Indian Economy (CMIE) announced the net sales that the companies did in the non-financial sector, have all shown a rise of about 5.9%, which could be touted as the first positive growth since September 2014. Whereas on the other hand, the operating profit growth for the non-finance sector, has reportedly shown an increase of 21.5% from about a year ago, which could be touted as the highest ever, since June 2014’s quarter.
When we refer to the manufacturing sector, the sales growth which is about 7.5% is also highest since 2014. Similarly, the growth of profit of the same sector, including that of the petroleum products is a surprising 30%. This rate would be the highest year on year rate, since the year 2012. Just one look at these numbers would make one believe that the demonetization effects would be dismal for the corporate sector of finance. One question which would plague every mind would be the procedure through which we got such high results.
There were quite a few sectors that took a direct major, hits. The electronic sector, the retail sector as well as a majority of food services were unable to protect themselves from the onslaught of the situation. On the flip side of this grim picture, the banks did see a stark influx in the deposits department, with some of them being illegal as well. But there was a great chance of misbalancing of the credit deposit ratio, as many banks lacked the avenues to lend money to anyone. It became a kind of a double-edged situation, where a bank would face windfall gains of a treasury, on the other hand, it could also face a downward blip in its bond yields.

The banks are absolutely sure to benefit are those that are known as the payment banks. These, and other entities, which make a part of the transaction ecosystem will be more likely to become long-term beneficiaries. This would be a direct result of more and more cash finding its way into banking channels, which are more formal in nature. Banking habits, both of the corporate sphere and the retail sphere, will definitely be improving majorly. Investors would soon come to a realisation that liquid cash is not really the safest asset and dealings in the same should thus be avoided.
Various other policies are being implemented in association with demonetization. With the liquidity positions of various commercial banks strengthening over time, this would be able to benefit the corporate finance sector as well, mainly for all the investment banking and lending purposes. But it seems like this situation would be momentary as there is bound to be an influx of withdrawals soon enough. With the entire finance sector heading for an interesting turn of events, it is obviously going to increase the number of finance aspirants. This momentary as there is bound to be an influx of withdrawals soon enough. With the entire finance sector heading for an interesting turn of events, it is obviously going to increase the number of finance aspirants.