13 Nov 2016

Did the Currency Ban leak lead to spike in Bank Deposits?

The recent currency ban by the Govt has attracted feedback both positive and negative. As expected, the opposition largely slammed the move either from the very beginning (Mamta Banerjee tweeted all in caps, terming this a draconian move) or after waiting for a couple of days (Congress lent cautious support in the beginning, and then changed tone looking to capitalise on inconvenience being faced by common citizens)

These don't matter. Traditional parties (including BJP) oppose almost every Govt decision while in opposition, even if they take similar decision when in power (Eg. GST)

However, when AAP alleges a huge scam, I generally dig deeper since they have occasionally brought out genuine issues based on good data analysis. Kejriwal, in a recent press conference, cited a supposedly huge spike in deposits prior to the Currency-ban announcement by the Govt, and accused Govt of leaking the news to its "friends", who then deposited their black cash stash before the ban (causing the spike), and hence somehow converted their back to white. On social media, a graph (reproduced below) was also shared by a user quantifying this allegation, showing spike in Sep-16 deposits compared to Aug-16, whereas no such spike was seen in 2015. Slam dunk case for the assertion on deposit spike, it would seem. 
Source: Gaurav Shukla

This post is to discredit this assertion.

But let me first let me dispute the inference that such Deposit spike (assuming the assertion is correct) prior to the PM announcement has helped the deposit-holder launder the money. Incorrect. If someone deposits money in the bank, it has to be white, irrespective whether it was deposited before or after the announcement. If black money is deposited in the bank, again irrespective of whether the deposit was done before or after the announcement, IT department can easily come after you. All deposits >50k are tagged by Pan Card, and in any case almost all banking accounts are KYC-compliant. And even if someone laundered black money before the announcement by aggregating multiple individuals (thereby each single deposit will be of small value which IT dept shall evade), he can do that even now, there is a 50 day time window to deposit old notes through the time-tested money-laundering techniques.

So even if "Friends of BJP" were warned beforehand, and they deposited their black cash stash in the banks before PM announcement on Currency Ban, they would be caught. And if it is white money cash that was deposited, it could very easily be deposited after the announcement. And if it is black money deposited by aggregating thousands of individuals, even that is possible after the announcement given the 50-day time window. 

So now let me come back to data on Deposits showing a spike before the PM announcement. Whoever made this graph consciously or unconsciously left out October data - RBI publishes data in multiple places and not everything is synced. Below table presents the same. I have also shown Demand Deposits separately, because that is what I believe leads to the overall spike (as per hypothesis I shall pose later)

Note: My numbers are slightly different from the graph above. I have excluded inter-bank deposits which is the right way to look at the data. But the growth rates are similar

As evident from table above, there is a de-growth of 2.2% in deposits in Oct-16 compared to Sep-16. In fact, demand deposits de-grew by 11% in Oct-16! If indeed "Friends of BJP" were forewarned and they scrambled to deposit their black cash (which anyways wont have helped them escape IT dept as pointed out earlier), naturally deposits (and demand deposits) should have continued to increase in Oct-16 as well. So the assertion, when looking at complete data, doesn't stand true 

But still, the spike seen in Sep-16 is interesting, and needs to be explained. For that, first one needs to understand the data construct. This data is sourced from RBI (you can source it yourself by following directions provided at the end of this post), and represents deposits as on the last working Friday of that month, which might or might not be the last working day of that month. So the numbers we see in the graph (as being widely circulated on SM and reproduced above) and the table above are not for month-end. Oct-16 means 28th Oct, Sep-16 means as of 30th Sep and Aug-16 means as of 26th Aug. This is important. Banks are commercial organisations and almost all of them are listed, and their employees have quarter-end targets as is the case for most other listed companies. In case of banks, deposit base "miraculously" increases significantly on the last working day wherein branch managers "request" their corporate / SME customers to deposit as much money as possible in the bank in their current account (and that is why I have included the demand deposits in my analysis above) on the last working day, just to be withdrawn the next working day. I have seen it happen first-hand in multiple banks where my professional experience has allowed me to have an inside peek. In most cases, these last-day deposits are nothing but money drawn from a working capital account that the corporate / sme customer has with the same/different bank, which also leads to a spike in bank credit (more on that later).

The Sep-16 data in the above table is as of 30th Sep 2016 (the last working Friday of that month), which also happens to be the last working day of that quarter. Hence, I am not surprised by the 5% spike from previous month (and 15% in Demand Deposits), the entire bank machinery works overtime to achieve the quarter-end targets. To validate this hypothesis, I looked at monthly deposits data for last ~8 years (Jan-09 onward) and calculated avg growth rate on a month-on-month basis (94 instances, pretty decent sample size). I found 8 such instances when the last working Friday also happened to be the last working day of that quarter, the below table shows monthly deposit growth rate (and demand deposit growth rate) for these 8 instances.

So, the last time it happened, it was 29th march 2013 when the last working Friday was also the last working day of that quarter, and deposits spiked by 5.6% (demand deposits by 21.7%). On an average, deposits grew by 3.9% over these 8 instances (demand deposits by 15.2%), so a deposits growth of 4.9% (and demand deposits growth of 15.5%) for Sep-16 is nowhere out of the ordinary. To be fair, even Saturdays used to be working earlier but then it used to be a half-working day, and many corporate/sme customers from which these last minute deposits were sourced were also closed on Saturday, so it would be fair to assume that most of such deposit mobilisation was completed on Friday. I would have loved to have Saturday data here, but we don't have it. 

To complete the analysis, the below table compares these 8 instances (last working friday = last working day) with 23 other quarter-end instances (last working friday <> last working day), as well the 63 remaining month-end instances which were not quarter-end in terms of the monthly deposit (and demand deposit) growth rates. 

As the table above shows, for the 8 instances of quarter-end where last working Friday was also the last working day of that quarter, deposits grew by an average of 3.9% (demand deposits by 15.2%) as compared an average of 1.0% avg deposit growth rate (and 3.7% avg demand deposit growth rate) for the 23 other instances of quarter-end where last working Friday was not the last working day of that quarter.

Another way to validate this hypothesis is to also check the bank credit growth rate, which should also exhibit similarly different growth rates depending on whether the last working Friday is the last working day or not. Turns out, it does! See the table below (I have included the Deposits growth rate from previous table for comparison).

Hence, for the 8 instances of quarter-end where last working Friday was also the last working day of that quarter, bank credit grew by an average of 4.4% as compared an average of 1.9% for the 23 other instances of quarter-end where last working Friday was not the last working day of that quarter. 

I would have loved to compare only the working capital credit growth rate (and not the overall bank credit) with the demand deposit growth rate, since that it where the real spike happens. But we do not have that data.

Finally, I also need to state that bank deposits is not equal to currency in circulation, i.e. the increase in deposits does not mean fresh currency earlier residing as cash has been now deposited in the bank. Total currency in circulation in India is less than Rs 20 tn, whereas the deposits are well above Rs 100 tn. This similar to GDP multiplier effect, which people interested in macro-economics can research on their own. But very briefly (and crudely), if you deposit Rs 100 in the bank, the bank lends that to a business who uses it to generate output which, partially, gets converted to cash in the hands of the business as well as its employees, which in turn will again deposit the same in bank. So original Rs 100 deposit leads to a  much larger deposit in the bank. So the Rs 5 tn increase in bank deposits in Sep-15 doesn't mean Rs 5 tn currency has been taken out of circulation and deposited in the banks. This is not exactly how it happens, but you get the gist. 

Directions to source data used for above analysis: 
1. Goto https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home
2. Click on "Business of Scheduled Banks" on left side
3. Export data in excel by clicking on the relevant button at the top of the table
4. In the excel file downloaded, use "2.1) Aggregate deposits", "2.1.1) Demand deposits" and "7) Bank credit" for the three data series used in the above analysis.    

"In God we trust, rest all must have data"

Edit: There seems to be an explanation for Sep-16 deposit spike that 7th Pay Commission arrears were released on 31st Aug which caused the spike. News search suggests that number to be Rs 346 bn, far less than the spike of ~Rs 5 tn, so that doesn't seem to explain this. Unless the number of Rs 346 bn is wrong. I still think the last working Friday being the last working day of that quarter is the correct underlying reason. Further, added credit for the first graph.

17 Apr 2014

India and Literacy

As we argued in the previous article: In a non-communist economic set-up we can't rely on averages to assess whether the wealth creation has flown through to the masses or has it been concentrated in the hands of a few. We would have to gauge the improvement in standard of living of the society as a whole by looking at several socio-economic metrics at a disaggregated level, and not as an average. 

Education perhaps is the most important tool that an older generation can give to the younger generation. Education of course opens up many avenues of job opportunities, directly improving economic condition of an individual - that connection is of course too obvious and well known. However, it is not merely about the technical / quantitative / science knowledge - education also makes a person more aware; more aware in terms of evolution of the society he lives in, lessons mankind should have learnt from the past, as well as it moulds him as a person better fit in the civilized world of tomorrow. Schools do often impart some of the first lessons on morality and ethics as well, that education of course best starts at home. Folklore is rich with tales of college drop-outs making fortunes (Bill Gates and Steve Jobs are oft-quoted examples), that shouldn't be used to trivialize basic school education. College comes much later, ABCD pehle aata hai (Alphabet comes first).

13 Apr 2014

How we "live"

As often argued by capitalists, economic improvement of a society requires a section of it to lead the quest; that section who can channel accumulated capital, has risk appetite and / or possess requisite skills. Consequently, such section of society garners a more-than-proportionate share of resultant wealth creation in a capitalist society. What about the society at large...often asks the left. Indicators as avg GDP growth etc. are usually thrown as a reply. However, there is always a genuine case to be made that these metrics fail to explain if such wealth creation has been concentrated in only a small section of the society or has flown through to the masses at large. Not to suggest that income distribution be exactly equal (that would be the theoretical leftist argument, which in practice means no income improvement), rather that most sections of society should benefit to a respectable extent, of which some would be above average, others would be lower but not significantly and should score a healthy improvement.

Long story short, we would have to gauge the improvement in standard of living for various states by looking at several metrics at a disaggregated level, and not as an average. 

6 Apr 2014

Water water everywhere, not a drop to drink...

I come from a very small town in one of the so-called bimaru states of India. Being born and brought up in a relatively less well-off middle class household, I recall several memories of my childhood where my parents struggled with day-to-day chores due to the generally low standard of living prevalent in Indian towns and villages at large. None of those memories stand out more than those related to water - one of those commodities most essential for survival . So little justice done to it as well - the old Hindi proverb of Roti, Kapda aur Makaan (Bread, Cloth and House) was probably coined during the good old days when wells were aplenty in small Indian villages, and fetching a pale of water or two was a welcome gossip time for the Indian housewife. (The office water cooler gossip is no different for us the corporate slaves). 

Water was trivial then, but not today. 

Lies and Lives

“All’s fair in love and war”, goes an old saying. The current political discourse in our country has perhaps moved much closer to a war-like situation than it has ever been and hence it is but natural for political opponents to rake up non-issues, spin-doctor them and then present them as gospel truth as they wage this war upon their political opponents. One can view such episodes with a general mistrust of all politicians, but given the 24*7 media (including social media) attention, every such move gets wide-spread publicity and ends up influencing a section of the electorate. The truth, often, gets lost somewhere in the din.

Politicians would continue doing this to score brownie points. None other that Mr. Vajpayee told this, in 1991, to the then finance minister Mr. Manmohan Singh. (Apparently Mr Singh, a newly-turned politician, took opposition’s criticism of his first budget to heart and communicated to PM Mr. Narsimha Rao his desire to resign. PM Rao mentioned this to Mr. Vajpayee, and the latter shared the above wisdom with him and requested not to resign on this issue). 

10 Mar 2014

The Most "Power"-full States

Electricity, perhaps, is the one of the most important commodities, yet significantly under-valued. Don't get me wrong - everyone hates power cuts; but its true value is not fully appreciated. Electricity just doesn't run television at home, it also provides a few hours of daily family entertainment to lower-middle / poor class, for whom otherwise no real, affordable alternatives exist. Industries are large beneficiaries as well - higher uptime results in efficient utilization of resources (including labour), higher output and value creation, and economic well-being for human factors. 

After a much publicized visit of Arvind Kejriwal to Gujarat, there are debates on SM whether Gujarat is really as advanced on electricity front as is often claimed by its long-serving CM Mr. Narendra Modi. Dubious claims are made by both sides on this issue. I believe this can be satisfactorily analysed and concluded based on reliable data available in public domain.

9 Mar 2014

The Missing Link

With the advent of Social Media (SM), there are far more debates on politics and governance happening in the country, opening up space for public participation on an unprecedented magnitude. However, such discourse is also prone to 5-minute-Google based argumentation, made-up-facts, and outright lies + propaganda. Often, most of the audience being innocent bystanders gets influenced by statistics presented as gospel truth, but really are cherry-picked / twisted facts, opinions or worse, falsehoods. Some argue that the latter is often more pronounced - the frontyard of SM is littered with sponsored bots.

This is dangerous, since such incorrect statistics not just influences public opinion, but also translate into potentially ill-informed electoral choices on a wide scale.