Tuesday, 15 November 2016

Short Term Credit Mismatch – Life after 500 and 1000 Notes Ban?

In India, a revolutionary action has being taken with Rs. 500 and Rs. 1000 notes been discontinued. They are no longer a legal tender.

In the previous blog, you read that "On Tuesday, PM Narendra Modi made an announcement that RBI (Reserve bank of India) demonetise Rs 500 and Rs 1000 currency notes universally from 8th November 2016 Midnight. 

The Indian economy has two facets to it – one the real economy and other the cash economy – and most of the trade transactions used to happen in cash (i.e both buying and selling happening in cash).
Considering that the currency notes in circulation, in general, represent approx. 12% of the Country’s GDP (among the highest in the world), a move like this is bound to have economic implications, atleast in short term. As an analogy if we consider trade as a machinery and cash as oil; the demonetization has essentially led to removal of oil from the machine which would lead to slowing of the machine aka the trade.

While this is a short term phenomenon and the financial institutions are geared up for managing and ensuring that the impact of this move is limited, in the short term the general traders may look at following options to manage the short term credit mismatch

1.       Plastic currency: Use of credit cards may be encouraged to sustain the momentum of trade;

2.       Digital wallets: Digital wallets including PayTM, Mobikwik, PayU may be used for ensuring transactions are happening on a regular basis, for smaller amounts (of course)

3.       CC Limits/ OD Limits: Banks and financial institutions are encouraging use of RTGS/ IMPS/ NEFT for transfer of funds to be used for trade – is case businesses have surplus limits – online transactions should be done to continue trade

4.       Peer to peer lending: Another alternate at this stage is to use p2p lending which not only provides access to short term credit but also this is done at a very fast pace. The traders/ general public who do not have limits from any financial institution and are facing a short term credit mismatch may create an account online on a p2p platform and get access to credit quickly.

While the common man is supporting the Governments move to demonetization; at the same time options such as p2plending act as a support to ensure there are no disruptions in the trade also.

Source: Economic Times

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