How does the demonetisation of high value currencies affect Indian banks?

Analysts see positive impact from more CASA deposits.

In an unprecedented move, the government has cancelled high denomination bank notes of INR500 and INR1,000. Its objective is to curb black money in the economy and eliminate the circulation of fake rupees.

Maybank Kim Eng analysts see this as a long-term positive for the banking system. More money is expected to flow through the formal banking channel, potentially raising low-cost deposits (CASA) and transaction fees. Banks with a vast geographic presence and digital preparedness should gain.

Here's more from Maybank Kim Eng:

Blow to parallel economy
With this cancellation, the unorganised sector, which depends heavily on cash, should move towards the formal channel. The government stands to gain from higher revenue collection as tax compliance increases.

This move should also tackle corruption. Sectors such as the real estate, with a high proportion of cash transactions, should be affected, although the extent is difficult to ascertain at this juncture as the situation is evolving.

Banks’ deposits and fees could rise
We see a positive impact from potentially more CASA deposits. Any increase in bank liquidity may also bring down interest rates. Banks’ fee income may, in addition, increase on the back of higher transaction volumes.

Long term, as savings improve, we see insurers, mutual funds and wealth management benefiting. On the other hand, the business of non-bank finance companies - which depend on cash collections - may bedisrupted in the short run. Also, those with high exposure to the property sector may be pinched by a sharp downturn in the value of property collateral.

Prefer private banks to state ones
We prefer private banks to state-owned banks as they should be better prepared to handle higher volumes. Private banks have invested in multiple digital offerings such as app-based banking and web-based solutions.

In recent years, most have also added branches aggressively. Their higher capital base and productivity should better position them to  capture market share.