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Effect of demonetisation on life financial sector?


With the centre’s decision to scrap old currency notes of Rs 500 and Rs 1,000 on November 8, 2016, the financial sector is now bracing itself to deal with the move’s impact. Experts say that it is a good move as it will bring more formal money in the financial sector.

Banking Sector
Banks are providing exchange counters where you can exchange your old Rs 1,000 and Rs 500 denomination notes. All banks will remain open this weekend i.e., 12 and 13 November, 2016, to facilitate the exchange and deposit of old currency notes of these two denominations.

The maximum you can exchange in cash against old notes is Rs 4,000. For this you will have to provide a photocopy of an identity document along with a filled-up form. Do also carry the original identity document. However, there is no limit on the amount you can deposit in the form of your old notes. Also, you have 49 days – till December 30, 2016 – to exchange them.

To deposit money, you don’t necessarily have to go to your own bank’s branch. You can visit any bank’s branch, Reserve Bank of India (RBI)-specified offices and post offices to exchange the old currency notes. Your money will be credited to your bank account if you don’t want anything in cash.

Some banks have waived cash deposit charges in savings accounts till November 30, 2016. Some banks have also waived ATM transaction charges in same bank ATMs.

Mutual Fund Industry

Officials from mutual fund industry say that there is no doubt that money will come in mutual funds. Increased inflows into mutual funds are not an expectation; it’s bound to happen. If money comes in from the organized sector to the organized sector and the bank deposit levels go up, then some of the money comes into mutual funds.

At present, equity funds amount to about 30% of the overall industry’s assets under management. The question is whether the incremental inflows can come into equity funds or debt funds.

Till now, much of this cash used to be channeled towards real estate and gold. So, investors have been used to seeing gains at a portfolio level. Now if this money comes into banks, investors will not be satisfied with earning just 4% interest.

While the share of incremental inflows into capital markets and equity funds would go up, investors will also invest in liquid and debt funds.

As deposits will increase in the banking system, the fixed deposits (FDs) rates would start to fall. The influx of money will lead to deposit rates going down. This also helps allocating additional money in equity funds.

Insurance Sector

The insurance sector will see little impact and for a short duration. In the last few years, especially the private sector insurers have discouraged cash transactions. People who prefer paying cash will have to pay through their bank accounts. But unbanked customers, like people in rural areas, may find it difficult to pay up in the immediate future. However, last minute pains can be avoided if customers are proactive. For renewals, insurers notify the customers in advance. For insurance policies even after the due date there is a grace period of 30 days for annual premium policies during which time the policy expires but continuity benefits are given if the premium is paid within the grace period.

Agency-driven policies will be hit the most as agents tend to collect premiums in cash. Bancassurance channels collect premium online or through cheques.

There are rules to prevent anti-money laundering, even as there no cap on cash transactions. For instance, customers who pay premiums in cash in excess of Rs 50,000 have to furnish their permanent account number (PAN).

The other checks and balances against cash transactions are through tax deduction certificates. For instance, in health insurance, if you pay premiums in cash you don’t get tax deduction benefit of section 80D.

The hiccups faced by agency channels will be short lived. In the agency channel, a significant number of transactions are cash based. They would be as high as 30-35% of the overall contributing premium. Ultimately this would expedite the process of people switching from cash to plastic and using online wallets and banking and in turn be a great boost for consumer internet businesses.

Pension Sector

For the pension sector, the move is being looked at as one having a long-term positive impact, even though it won’t have any immediate impact. Most of transactions in pension sector are through cheques.

A lot of cash that currently is not part of the formal banking system would come into the system and could make more people invest in pension products. People who are looking for retirement planning have an option of investing in the National Pension System (NPS).

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