In a startling move, the RBI scrapped the use of Rs 500 and 1000 notes from midnight 8th November, 2016. This has created some confusion amongst many and opinions are somewhat divided as to the actual impact of the move. While there is general concurrence among the finance and business circles that it is a bold and beneficial move, this is likely to be more helpful to start-up businesses.
Banks’ CASA will increase as cash will be sucked out of the system.
As the banks will draw a lot of cash from the financial system, the money in circulation will go down, especially with restrictions on withdrawal of cash from banks. Moreover, a part of money considered unaccounted money or black money will not return to bank. Same goes for the fake currency notes.
We have seen recently that inflationary pressures started to raise its head in the economy. We have seen major impact in the prices of food articles, especially pulses. The drawing of cash from the system will cool down the system quite fast, and can be deflationary in the short term — six months to one year timeframe. At the same time, banks will be forced to give more loans as they need to maintain CRR (Cash Reserve Ratio), and keeping money idle does not help them.
The situation is helpful to start-ups in many ways.
Most of the reputed startup heads tweeted about this move as it will nudge the economy towards the use of plastic money, netbanking, wallet etc. and reduce cash on delivery for e-commerce companies. This reduces the transactional risk of e-commerce companies, and even reduces their manpower costs.
While that is true to some extent, but there is more benefits than this.
Start-ups will save a good percentage on initial funds.
We all know that the startups burn a lot of cash initially till breakeven and any saving during this period is a boon to them. Now if the inflation cools off, they will be able to do just that. Real estate industry is expected to be hit by this move, and the prices will be under check till inflation catches up again with increased credit growth (which will happen slowly). Therefore, rental or office buying costs will be under check for the startups. Even initial interior décor costs will be under control. As there will not be runaway inflation, there will not be wage inflation also for some time. Startups will benefit in an environment of wage stability and attrition will reduce.
Bank loans can open up for some startups.
In a situation where banks are flush with funds to offer loans, some sound startups can avail of them. In any case interest rate is expected to head lower, and startup company balance sheets with debts will look much better.
Startups can restructure their balance sheets with some debt too and not depend on equity funding completely, offering some relief from impatient shareholders sometimes.
Overall benefits to the startups and their founders will be substantial. For a lot many startup founders, even their personal expenses will also be under check.
Author: Dipankar Dutta advises businesses on marketing strategy and implementation through digital channels and is Director of Excelligent Infotech Pvt. Ltd.