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Effects of demonetization on loans

Effects of demonetization on bank loan interest rates for home loans, personal loans, business loans etc.

The bold move taken by the government on 9th Nov for the demonetization of 500 and 1000 rupee notes is a welcome initiative by most of the people across the country. On the large scale, this move is a welcomed by and large with the exception of some inconvenience faced by the common people. While, there are multiple benefits because of this act, there are some sectors, which are going to take a hard hit over the demonetization of 500 and 1000 rupee notes.

Loans and Lending activity of Banks

When we talk about what effect the demonetization will have on bank interest rates for home loans, personal loans, business loans and other such loans, the things must be analysed in a different manner. Let’s take people have a lot of cash being kept in their homes and other such places. Because of this demonetisation, people are forced to deposit this money and exchange those notes through various banks, thus forcing them to furnish all details related to the cash. In a way, this process will increase the bank’s deposits by a huge margin and thus banks have more CRR, i.e., Cash to Reserve ratio, to maintain and with more deposits they can increase the lending activity all over the country. With this increase in the lending activity, the loans are expected to become easier and interest rates will go down; resulting in the easy loans, will increase the broad money supply and thus creating inflation. However, this is going to happen slowly and take a considerable amount of time.

Since, different kinds of loans are, one way or another, connected to the real estate and education, there are the loan types like Home Loans, which can see the direct effect on real estate. Since the Real estate is going to experience a hard hit over the demonetization of 500 and 1000 rupees, the property prices for the properties will see a downfall and this downfall will be around 20% to 30%. Owing to the decrease in the pricing in the properties, those people who are looking to buy a property through Home loans will be motivated in a way and thus, buying of homes with the help of home loans will increase in upcoming days. However, one must keep in mind that the demand of home loans will go down for a short time for lack of ‘cash fund’, but as the market will settle gradually.

The other types of loans like Education loans, Personal loans and Business loans will be greatly impacted. All startups that are looking for the business loans can get the business loans easily and at the lower rates of interest. Thus, with the easy loan availability, the startups will grow in huge numbers and people will look motivated towards starting their own venture.

There are both positive and negative perspectives about the demonetization. While, there are phases where people may face troubles for some time, the advantages are greater in the long term.

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