By The Editorial Board of TJEF

(Anil Shankar, Gandhali Inamdar and Isha Varma)


Demonetization has been the buzz word since November 8th 2016 when our Prime Minister made the historic announcement about the decision to discontinue the 500 and 1000 rupee notes. This historic decision has affected almost all the sectors. Some have benefited while others have suffered. This paper intends to analyze the effects of demonetization on the major financial institutions and the Indian economy in general.

Effects of Demonetization on Banking sector

Since the advent of asset quality review (AQR), there has been a rise in the number of NPAs. To get an idea, the GNPA of banks is 6 lakh crore as of June, 2016 which is 8.2% of the total loans1. These are only the NPAs as there are an equal number of restructured loans which might transform to NPAs in future.


Figure 1: Total NPAs as of March 2016, Source: Finance Ministry

A recent data provided by the Finance ministry, which has been depicted in Figure 1, shows that 5.3 lakh crore of the 6 lakh crore NPAs are under the public sector banks. It’s clearly visible that there has been a rise in the NPAs from October 2015. This can be attributed to the ever greening of loans which led to the creation of a distorted picture of the banks. Though the asset quality review led to the identification of such NPAs which were previously classified as standard, the problem of NPAs existed since the 2008 financial crisis but remained hidden due to the above mentioned reason.


Budget Series 2017-18 #7 Impact on IT Sector

By Anil Shankar & Divya Ramesh

The famous Greek scholar Heraclitus one said: “change is the only constant”. There was a perception that nothing can hinder the phenomenal growth of Indian IT sector. But for the past couple of years, that image has taken a dent due to various factors. In this article, we analyze major factors that have affected the Indian IT sector and the effects of the same.


The volatility in the British pound was one of the major points of concern which the IT sector had post BREXIT. Also, there is a lot of uncertainty regarding the structure of the financial and banking sector. One of the early victims of BREXIT was the deal between Infosys and RBS to float a new standalone bank called Williams and Glyn. The move to abandon this project forced Infosys to shift nearly 3000 of its employees to other projects. It also affected their bottom line and also had to reduce the revenue guidance subsequently. On the other hand, if structural changes are to be carried out on financial sectors, then this might actually result in more contracts.


The uncertainty revolving around the Trump presidency is one of the main factors which might have a detrimental effect on the Indian IT sector. More than 60% of the revenues that the IT industry generates comes from the US. Recently, a bill was introduced in the US House of Representatives which seeks to double the minimum wage of H1B visa holders to $130,000. If passed, the Indian IT companies would be forced to hire more Americans than Indians and thereby affecting their bottom line.

During the campaign, Trump made his intentions clear about the possible repeal of Obamacare. Since healthcare has been one of the areas which have been growing fast for the IT sector, implementation of such actions would have a negative impact. Also, Trump has plans to cut back on regulations and compliance related spending by Banking and Financial services sector. Since about 40% of the revenue is generated from these clients, lowering the regulations would have an adverse impact on the revenue generated.


From the graph below, we can observe that 35% of the domestic revenue that the IT sector makes comes from government projects followed by the banking and financial sector. With the Budget 2017 containing schemes to digitalize India, the domestic IT sector would witness a lot of government opportunities knocking on its door. The Government’s motive to weed out corruption through digitalization has been shown in the Budget 2017 with a push to a digital economy. Budget 2017 has acted as a foundation for India to technologically transform and evolve into a digital economy.


Fig 1: Shows the contribution of various sectors to the domestic IT Revenue

The e-governance portal’s traffic has been on the rise from 2060 million transactions in 2013 to 4940 million transactions in 2016 which is a 140 % increase. TCS, Infosys, Mind-tree and few other players in this sector have been handling government projects like automation of immigration system by TCS, application development and maintenance of unique identification authority of India by Mindtree and implementation of GSTN by Infosys which is crucial for the implementation of GST which was also a highlight of the Union Budget 2017. The programs like:

  1. BHIM app promotional schemes
  2. Aadhaar pay app for cashless transactions
  3. Political parties entitled to receive donations through digital mode
  4. Aadhaar based smart cards to monitor health for senior citizens
  5. High-speed internet for gram panchayats

have provided a platform full of government IT projects.


There has been a big emphasis on automation by the IT industry in the recent past. The idea is to improve efficiency and productivity of firms. Automation can lead to a smaller workforce and more revenues. Although there is a point of debate as to whether this move is good for the economy in the entirety, big companies are going all out to automate their products. Some companies build their own products to realize this goal while others take the route of inorganic expansion to acquire these capabilities. For example, Infosys acquired US based automation technology company Panaya to bring about automation in several of Infosys’s service lines. Automation, hence, would play a big role in the IT companies profitability in the coming future.

Impact of Demonetisation on NBFCs

By Monica V.

Demonetization is expected to negatively impact NBFCs in the short run, however, no significant long-term impact is expected, as the liquidity crunch is cyclical and not structural.

Factors that will influence the Impact:

Loan against Portfolio (LAP)- CRISIL in its sector analysis recently said that LAP as an asset class would witness pressure. A fall in resale prices of property and elongation of time to liquidate a property would exacerbate delinquencies in this segment. LAP business faces asset quality risk because NBFCs have aggressive lending practices as they consider unaccounted income while deciding on income eligibility and loan amount for a borrower.

Exposure to Small and Medium-sized Enterprises (SMEs)- A significant portion of SMEs thrive on the success of the parallel economies, hence, greater the exposure to SMEs greater will be the negative impact on the earnings. Public sector banks are likely to have a greater negative impact than private sector banks, as they have more exposure to SMEs.

A Proportion of Unsecured Loans- Greater the number of unsecured loans, such as consumer durable loans or personal loans, greater will be the as against secured lending such as mortgage lending.

Exposure to Real Estate Loans- Majority of Real Estate transactions happen with black money, hence demonetization is likely to reduce the demand. This will bring in the much needed correction in the real estate prices in India, and provide an opportunity to the middle class population to make real estate investments which is a positive in the long run. Also, demonetisation may prove beneficial for lenders and housing finance companies (HFCs) as the average size of home loan is likely to increase, as people have less cash in hand and thus would need to borrow more. Furthermore, since majority of real estate transactions happen using black money, demonetisation poses a greater concern about the growth of NBFCs rather than on asset quality.

Businesses running on daily credit basis- Customers, such as small farmers and unskilled labourers, of NBFC-micro financial institutions (NBFC-MFIs), whose livelihood is based on cash payments, do not have bank accounts and/or sufficient means to either exchange existing Specified Bank Notes (SBNs) in their possession into notes of acceptable denomination, or make a transition to cashless means of finance. This is impacting their daily businesses, and thus negatively affecting the timely repayment of loans taken by them from NBFC-MFIs.

Limit on withdrawal by NBFC-MFIs- NBFC-MFIs generally lend to smaller customers by borrowing from banks. Thus, a restriction on their borrowing will negatively impact onward lending to their customers. Thus, it is being argued that:

  • Similar to banks, NBFCs should be allowed to exchange SBNs as they have greater penetration in rural India than banks,
  • Should be allowed to receive payment of loans in SBNs, upto a certain period, as this will reduce cases of unintentional defaults in loans and also ensure that the overall asset quality of the NBFC-MFI sector does not get eroded
  • The withdrawal limits for companies involved in the micro-financing sector should be relaxed in order to promote growth