Impact of Demonetization on the Banking Sector in India

Abstract On 8 November 2016, the Government of India demonetized ₹500 and ₹1000 banknotes, which constituted about 86 percent of the currency in circulation. The policy aimed to curb black money, eliminate counterfeit currency, and promote digital transactions, but it also generated a significant liquidity shock in the largely cash-driven Indian economy. This study analyzes the short- and medium-term impact of demonetization on the banking sector, focusing on deposit mobilization, credit growth, liquidity conditions, digital payment adoption, and overall financial performance. Drawing on secondary data from Reserve Bank of India (RBI) reports and related research, the findings reveal a substantial surge in bank deposits and liquidity, accompanied by a temporary slowdown in credit growth, particularly in rural and MSME sectors. At the same time, digital transactions such as NEFT, RTGS, IMPS, and mobile banking expanded significantly. Although banks faced operational challenges during the transition, demonetization accelerated digital infrastructure development and strengthened formal financial participation. Overall, the policy acted as both a disruptive and transformative force, reshaping India’s banking landscape through enhanced liquidity and increased digitalization. Keywords: Demonetization, Banking Sector, Deposit Growth, Credit Expansion, Digital Payments, Liquidity, Financial Inclusion, RBI