Demonetization & Its Impact on Businesses

In a grand move that has taken the country by surprise. The scrapping of high value notes to curb black money circulation in the economy is seen as a major step to reduce corruption & poverty as quoted by Prime Minister Narendra Modi.

The issue of black money in the past has been in debate vehemently during a number of elections, mostly pointing towards the cash stacks hidden in Switzerland & other foreign countries. However, in the recent past, the focus on the same closer home has helped the government raise nearly $10 billion through a tax amnesty for Indians to declare hidden income and assets.

Demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization is necessary whenever there is a change in national currency. The old unit of currency must be retired and replaced with a new currency unit. – source: Investopedia

The banning of higher currency notes and introducing new currency notes might have a significant and long term impact on the economy. However, sectors like Real estate, unorganized trade, commodities, agricultural sector & services might have a negative impact. With Liquidity crippling, both NPA & working capital needs are most likely to go up.

Small Businesses both in urban & rural areas will feel the heat as these are mostly run via cash transactions. Also with the rise in NPA banks will be averse to fund these businesses even for a short period of time.  Businesses with cash transactions will now have to rely on funding from other sources and might end up paying a lot more.

Business Impact Analysis:

1. Liquidity – The immediate impact will be on liquidity. Businesses dealing with a large amount of cash can no longer use the currency to drive business.
2. Loan Demand – To fill up the gap and run the business smoothly the demand for loans or funding from the bank and other financial institutions will increase.
3. Loan Dis-approval – Businesses dealing with cash will have difficulty in getting funding as the Balance sheet will give a different story, making them unqualified for loans. Moreover, Banks will be reluctant and extremely cautious as they would want to avoid NPA’s.
4. High Cost – Even if one can avail funding through other institutions, the cost of lending will be much higher.

How Kredx Can help at this time of ‘Change’:

Kredx is a Unified Invoice Discounting platform. In simple terms instead of waiting for 30 to 90 days to get your invoices cashed, businesses can get the same via discounting their invoice. Our platform provides an opportunity for retail investors to participate in the process.

1. Liquidity – Kredx will help solve the fundamental problem of Liquidity. No cash transaction to seek to, for getting your business running. Make use of your existing invoices.
2. Scalability – Amount of funding is dependent upon the credit worthiness of the business and the Invoice value and therefore can grow with the business
3. Flexibility – No contractual obligation to use KredX for all/any financing needs. Businesses can come and go as they like
4. Transparency – No hidden or opaque fee structure. Simple fee structure which is pre-determined at the time of funding
5. Less Documentation & Cost – once registration is completed. Future documentation requirement is very minimal. No collaterals or bank-guarantees are required. cost of borrowing is generally lower than other funding mechanisms

With the rise in digitization and use of technology, businesses can only look forward to benefit. Easier processes, transparent systems & a more reliable ecosystem are a few obvious effects.  With the need for white financing now and the possible increase in financing gap by $100-200 bn, Kredx can help solve cash flow issues for companies.