When Indian Prime Minister Narendra Modi announced the withdrawal of ?500 (US$7.40) and ?1,000 (US$15) banknotes from circulation in November 2016, the government said its demonetisation drive would curb India&rsquo;s shadow economy and suppress the use of illicit and counterfeit cash in the economy.

If there&rsquo;s one sector that&rsquo;s done particularly well as a result of government&rsquo;s move, it&rsquo;s the banking sector.

Banks received deposits worth ?6 trillion (US$88 billion) and overall banking deposits with the Reserve Bank of India reached a record high of ?4.3 trillion (US$63.1 billion) within two weeks of the currency ban.

So the demonetisation was a well-planned move in terms of the health of the Indian banking system. Five months before the drive, the total amount of gross non-performing assets (loans are classified like this after 90 days of non-payment of interest or principal) for public and private sector banks was around ?6lakh crore (US$88 billion).

To understand how big this problem was, one needs to see the figure against the total loans given out by India&rsquo;s banking system. That ratio corresponded to 11.8 per cent of total credit advanced in September 2016, and it&rsquo;s expected to reach 12.5 per cent by March 2017.

The bulk of these non-performing assets are from public sector banks, and were mainly lent to finance the basic metal and metal products sector, the textile industry and the beverages sector.

In its December 2016 Financial Stability Report, the Reserve Bank noted that the asset quality of public sector banks had deteriorated further between March and September 2016. This reflected the failing health of the Indian banking system, which is a major provider of credit to industry and business. If not checked in time, it can have serious repercussions for the economy.

Bringing currency back

So calling the demonetisation drive a complete failure, as many economists and financial analysts have done then, is to fail to respect this well thought-out strategy for saving India&rsquo;s banks. Demonetisation has fulfilled the objective of bringing currency back into the banking system.

Within the first month, practically all demonetised currency notes in the country were back in the bank vaults. The sudden flow of cash to public sector banks gave them an instant lifeline clearly visible across the banking system.

Enriched by these higher deposits, the country&rsquo;s largest lender, the State Bank of India, slashed its benchmark lending rate by 0.9 per cent. In other words, after difficulty dealing with bad loans, after demonetisation banks are now able to provide cheap financing.

Not only did lending rates get slashed, the overnight marginal cost of funds-based lending rate (the minimum interest rate below which a bank cannot lend) fell to 7.75 per cent from 8.65 per cent. Meanwhile, three-year loan rates came down to 8.15 per cent from 9.05 per cent. While these percentages may seem small, it was a huge turnaround, which were reeling under the pressure of the bad loans.

Another winning sector

Amid the frenzy after demonetisation, another sector that got a big boost was that of financial technology start-ups, including digital wallet and other mobile payment companies. Due to the cash crunch, many people turned to digital wallets that can be used in conjunction with mobile payment systems, allowing them to pay for purchases with their smartphones.

Digital wallet companies saw an unprecedented surge in the number of people signing up for their services and adding money to their wallets after demonetisation.

Among mobile wallet companies, Paytm was the biggest beneficiary. We can gauge the impact of the demonetisation drive on its business by looking at the company&rsquo;s user base, which has reached 160 million &ndash; a fourfold increase since May 2016. Paytm&rsquo;s traffic rose by 435 per cent, app downloads grew by 200 per cent, and the company saw a 250 per cent rise in overall transaction value.

In fact, &ldquo;Paytm karo&rdquo; (literally, &ldquo;do Paytm&rdquo;) became one of the most common phrases during the early parts of the demonetisation drive, and sectors that have been traditionally cash-based, for example, small shopkeepers and public transport, such as taxis and auto-rickshaws, started accepting Paytm.

Such was a stardom of Paytm that it featured in a Harvard Business School case study of the company&rsquo;s transformation from online recharge platform to India&rsquo;s largest mobile payments platform.

Ultimate failure

The demonetisation drive, then, could be seen as a blessing for India&rsquo;s move towards a cashless economy and for encouraging consumers to use digital payment platforms. It also supports the government&rsquo;s Digital India initiative, which aims to encourage cashless payment solutions across the country by putting technological infrastructure in place.

But it&rsquo;s difficult to assess whether India is ready for a cashless economy. Traders tend not to reveal their actual income to avoid taxes and people are so used to paying for services in cash that for them to shift to new mode of payments requires a big habitual change.

The government&rsquo;s demonetisation drive, then, can be seen as an effort to curb the corruption and the flow of black money as stated, but also to force the general population to embrace digital payment options.

Unfortunately, it seems to have failed in both aspirations. Even though the main stated aim of demonetisation was to curb the extent of black money in the economy, during the first two months of the drive, almost 90 per cent of the scrapped and demonetised notes were back in the banking system. This stands in contrast to the government&#39;s expectation that roughly ?3 lakh crore (US$44 billion) of the scrapped notes would never return because they would be part of black money hoards.

The second consequence of moving towards a cashless economy may also be a failure. When cash returns to the system, many Indians are likely going back to the cash-based transactions given the over-dependence on cash-based transactions in the country due to limited connectivity and privacy issues related to transactions.

Ultimately, the demonetisation drive has been successful in making the banking sector healthier, but not what it was projected to do in terms of bringing in &ldquo;black money&rdquo; and turning the country into &ldquo;digital India&rdquo;.

This article was originally published on <a href="http://theconversation.com" rel="nofollow" target="blank">The Conversation</a>. Read the <a href="https://theconversation.com/indias-demonetisation-drive-has-boosted-banks-and-start-ups-but-its-still-a-failure-71704" rel="nofollow" target="blank">original article</a>.

The demonetisation drive has made the banking sector healthier but failed to curb 'black money'

When Indian Prime Minister Narendra Modi announced the withdrawal of ?500 (US$7.40) and ?1,000 (US$15) banknotes from circulation in November 2016, the government said its demonetisation drive would curb India’s shadow economy and suppress the use of illicit and counterfeit cash in the economy. If there’s one sector that’s done particularly well as a result of government’s move, it’s the banking sector. Banks received deposits worth ?6 trillion (US$88 billion) and overall banking deposits with the Reserve Bank of India reached a record high of ?4.3 trillion (US$63.1 billion) within two weeks of the currency ban. So the demonetisation was a well-planned move in terms of the health of the Indian banking system. Five months before the drive, the total amount of gross non-performing assets (loans are classified like this after 90 days of non-payment of interest or principal) for public and private sector banks was around ?6lakh crore (US$88 billion). To understand how big this problem was, one needs to see the figure against the total loans given out by India’s banking system. That ratio corresponded to 11.8 per cent of total credit advanced in September 2016, and it’s expected to reach 12.5 per cent by March 2017. The bulk of these non-performing assets are from public sector banks, and were mainly lent to finance the basic metal and metal products sector, the textile industry and the beverages sector. In its December 2016 Financial Stability Report, the Reserve Bank noted that the asset quality of public sector banks had deteriorated further between March and September 2016. This reflected the failing health of the Indian banking system, which is a major provider of credit to industry and business. If not checked in time, it can have serious repercussions for the economy. Bringing currency back So calling the demonetisation drive a complete failure, as many economists and financial analysts have done then, is to fail to respect this well thought-out strategy for saving India’s banks. Demonetisation has fulfilled the objective of bringing currency back into the banking system. Within the first month, practically all demonetised currency notes in the country were back in the bank vaults. The sudden flow of cash to public sector banks gave them an instant lifeline clearly visible across the banking system. Enriched by these higher deposits, the country’s largest lender, the State Bank of India, slashed its benchmark lending rate by 0.9 per cent. In other words, after difficulty dealing with bad loans, after demonetisation banks are now able to provide cheap financing. Not only did lending rates get slashed, the overnight marginal cost of funds-based lending rate (the minimum interest rate below which a bank cannot lend) fell to 7.75 per cent from 8.65 per cent. Meanwhile, three-year loan rates came down to 8.15 per cent from 9.05 per cent. While these percentages may seem small, it was a huge turnaround, which were reeling under the pressure of the bad loans. Another winning sector Amid the frenzy after demonetisation, another sector that got a big boost was that of financial technology start-ups, including digital wallet and other mobile payment companies. Due to the cash crunch, many people turned to digital wallets that can be used in conjunction with mobile payment systems, allowing them to pay for purchases with their smartphones. Digital wallet companies saw an unprecedented surge in the number of people signing up for their services and adding money to their wallets after demonetisation. Among mobile wallet companies, Paytm was the biggest beneficiary. We can gauge the impact of the demonetisation drive on its business by looking at the company’s user base, which has reached 160 million – a fourfold increase since May 2016. Paytm’s traffic rose by 435 per cent, app downloads grew by 200 per cent, and the company saw a 250 per cent rise in overall transaction value. In fact, “Paytm karo” (literally, “do Paytm”) became one of the most common phrases during the early parts of the demonetisation drive, and sectors that have been traditionally cash-based, for example, small shopkeepers and public transport, such as taxis and auto-rickshaws, started accepting Paytm. Such was a stardom of Paytm that it featured in a Harvard Business School case study of the company’s transformation from online recharge platform to India’s largest mobile payments platform. Ultimate failure The demonetisation drive, then, could be seen as a blessing for India’s move towards a cashless economy and for encouraging consumers to use digital payment platforms. It also supports the government’s Digital India initiative, which aims to encourage cashless payment solutions across the country by putting technological infrastructure in place. But it’s difficult to assess whether India is ready for a cashless economy. Traders tend not to reveal their actual income to avoid taxes and people are so used to paying for services in cash that for them to shift to new mode of payments requires a big habitual change. The government’s demonetisation drive, then, can be seen as an effort to curb the corruption and the flow of black money as stated, but also to force the general population to embrace digital payment options. Unfortunately, it seems to have failed in both aspirations. Even though the main stated aim of demonetisation was to curb the extent of black money in the economy, during the first two months of the drive, almost 90 per cent of the scrapped and demonetised notes were back in the banking system. This stands in contrast to the government's expectation that roughly ?3 lakh crore (US$44 billion) of the scrapped notes would never return because they would be part of black money hoards. The second consequence of moving towards a cashless economy may also be a failure. When cash returns to the system, many Indians are likely going back to the cash-based transactions given the over-dependence on cash-based transactions in the country due to limited connectivity and privacy issues related to transactions. Ultimately, the demonetisation drive has been successful in making the banking sector healthier, but not what it was projected to do in terms of bringing in “black money” and turning the country into “digital India”. This article was originally published on The Conversation. Read the original article.

India's demonetisation drive has boosted banks and start-ups, but it's still a failure

Based on allegations of digital wallet company Paytm, CBI has registered a fresh case against seven purported customers of the company alleging that they had cheated it to the tune of Rs 3.21 lakh ($4,728) through 37 orders spread over last two years.

CBI has filed FIR against seven customers listed by the company in its new complaint and unknown officials of Paytm.

The company, which has named seven customers in its complaint, has not identified any of its officials despite mentioning that its employees facilitating refunds have been assigned specific login id and passwords, making it easier to identify those who processed which refunds.

&quot;During routine reconciliation of accounts, the complainant company found that in 37 cases where refunds were made in the wallet or bank account of customers, delivery of orders were successfully made to the same customers,&quot; the complaint from M Sivakumar, Manager Legal of the company, said.

CBI has registered case under provisions of criminal conspiracy, cheating and forgery besides invoking provisions of Information Technology Act.&nbsp;

The customers who allegedly cheated Paytm were based in Lodhi Colony here besides Mathura and Bhilwara.

Surprisingly, customers&#39; having names like &quot;Hotty Killer&quot; and &quot;Brother&quot; did not ring any alarm bells in the systems of the $500 billion company as the refunds were facilitated despite successful delivery.

&quot;As a matter of facts, in cases, where delivery of orders were successful and satisfactory to customers, refund should not have happened. However, in all these 37 cases, refund of orders&#39; amount happened to the respective customers to the tune of Rs 3.21 lakh,&quot; the complaint alleged.

The details given by the company shows that Mathura-based &quot;Hotty Killer&quot; had made six purchases&nbsp;within seven days&nbsp;between March 31 and April 6, 2016 including an Apple iphone 6S worth Rs 45,688 and a Samsung Galaxy J2 worth Rs 8,705 and in all these cases refunds were processed by an employee having an id sunil.Bisht@paytm.Com.

The employee had also processed seven more orders of a customer identified as Pankaj Chaudhary, also resident of same address as &quot;Hotty Killer&quot;, between February 19 and April 3, 2016, annexures in the complaint show.

But despite having ids of its executive, the company did not name him in the complaint and subsequently FIR is also against unknown employees.

&quot;The fraudulent refunds as brought out under this complaint happened through the use/illegal use of user Ids and password of employees of complainant company entrusted for this task.

&quot;Hence, either the employees themselves or some persons associated with them or some unknown people have fraudulently refunded the order amount with common intentions to wrongfully gain along with such involved customers,&quot; the complaint, which is now part of the CBI FIR, alleged.

CBI had recently registered a separate FIR based on similar allegations of the company.&nbsp;

(PTI)

The digital wallet company says it has been duped to the tune of Rs 3.21 lakh ($4,728)

Based on allegations of digital wallet company Paytm, CBI has registered a fresh case against seven purported customers of the company alleging that they had cheated it to the tune of Rs 3.21 lakh ($4,728) through 37 orders spread over last two years. CBI has filed FIR against seven customers listed by the company in its new complaint and unknown officials of Paytm. The company, which has named seven customers in its complaint, has not identified any of its officials despite mentioning that its employees facilitating refunds have been assigned specific login id and passwords, making it easier to identify those who processed which refunds. "During routine reconciliation of accounts, the complainant company found that in 37 cases where refunds were made in the wallet or bank account of customers, delivery of orders were successfully made to the same customers," the complaint from M Sivakumar, Manager Legal of the company, said. CBI has registered case under provisions of criminal conspiracy, cheating and forgery besides invoking provisions of Information Technology Act. The customers who allegedly cheated Paytm were based in Lodhi Colony here besides Mathura and Bhilwara. Surprisingly, customers' having names like "Hotty Killer" and "Brother" did not ring any alarm bells in the systems of the $500 billion company as the refunds were facilitated despite successful delivery. "As a matter of facts, in cases, where delivery of orders were successful and satisfactory to customers, refund should not have happened. However, in all these 37 cases, refund of orders' amount happened to the respective customers to the tune of Rs 3.21 lakh," the complaint alleged. The details given by the company shows that Mathura-based "Hotty Killer" had made six purchases within seven days between March 31 and April 6, 2016 including an Apple iphone 6S worth Rs 45,688 and a Samsung Galaxy J2 worth Rs 8,705 and in all these cases refunds were processed by an employee having an id sunil.Bisht@paytm.Com. The employee had also processed seven more orders of a customer identified as Pankaj Chaudhary, also resident of same address as "Hotty Killer", between February 19 and April 3, 2016, annexures in the complaint show. But despite having ids of its executive, the company did not name him in the complaint and subsequently FIR is also against unknown employees. "The fraudulent refunds as brought out under this complaint happened through the use/illegal use of user Ids and password of employees of complainant company entrusted for this task. "Hence, either the employees themselves or some persons associated with them or some unknown people have fraudulently refunded the order amount with common intentions to wrongfully gain along with such involved customers," the complaint, which is now part of the CBI FIR, alleged. CBI had recently registered a separate FIR based on similar allegations of the company. (PTI)

Paytm accuses 7 more customers of cheating; CBI registers fresh FIR

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