Impact of Demonetisation on MFIs in India

MUKESH PATEL SCHOOL OF TECHNOLOGY MANAGEMENT AND
ENGINEERING
SVKM’S NMIMS
Impact of Demonetisation on Micro Finance Institutions (RP-I)
A Research Project submitted in partial fulfilment
of the requirements for the degree of
MBA (Tech)
By
Kanishk Agarwal (I001)
Atharv Johri (I014)
Idhanta Kakkar (I015)
Under Supervision
Of
Dr. Anuja Agarwal
Year of Graduation - 2018

DECLARATION
We hereby declare that the research project titled, “Impact of Demonetisation on Micro
Finance Institutions”, submitted by us is based on original work carried out by us. We certify
that it has not been submitted anywhere else. I further declare that Mukesh Patel School of
Technology Management and Engineering-NMIMS (deemed-to-be-university) will have the
copyright on the project report submitted by us to the college (MPSTME)
Thanking You,
Kanishk Agarwal Atharv Johri Idhanta Kakkar

ACKNOWLEDGEMENT
We would like to thank our college, Mukesh Patel School of technology and management
studies, NMIMS University for giving us this opportunity to work on a research project. This
has been an amazing learning experience for us.
We would also like to thank Dr Anuja Agarwal for giving her valuable time for reviewing
our work on a regular basis and giving us valuable suggestions. We would also like to thank
her for guiding us throughout this process.

Table of Contents
ABSTRACT 6
INTRODUCTION 6
BACKGROUND OF STUDY 7
STATEMENT OF PURPOSE/PROBLEM STATEMENT 7
OBJECTIVE 7
REVIEW OF RELATED LITERATURE 8
MORE FOCUS ON NBFCS AND MFIS 11
METHODOLOGY 20
DESCRIPTION OF RESEARCH DESIGN AND PROCEDURE USED 20
SOURCES OF DATA 20
SAMPLING PROCEDURE 20
METHOD AND INSTRUMENT OF DATA GATHERING 21
ANALYSIS AND RESULT 22
QUESTIONNAIRE 22
ANALYSIS 25
CRONBACH ALPHA 25
HYPOTHESIS 25
BOX PLOT 26
NORMAL DISTRIBUTION AND SKEWNESS 27
PAIRED SAMPLE T-TEST 33
FRIEDMAN TEST, WILCOXON TEST AND BONFERRONI CORRECTION 36
HYPOTHESES FOR BONFERRONI: 36
ELEMENTARY ANALYSIS 45
SUMMARY AND CONCLUSIONS 49
RESTATEMENT OF PROBLEM 49
DESCRIPTION OF PROCEDURES 49
MAJOR FINDINGS 50
CONCLUSION AND IMPLICATIONS 50
LIMITATIONS OF STUDY 51
SCOPE OF FUTURE RESEARCH 51
REFERENCES 52

Table of Contents - Figures
FIG 1: CUMULATIVE POSITION (POST DEMONETISATION) 13
FIG 2: COLLECTION EFFICIENCY OF BFIL 14
FIG 3: DISBURSEMENTS BY BFIL 14
FIG 4: COLLECTION EFFICIENCY OF BFIL 15
FIG 5: BORROWING CYCLES 16
FIG 6: UPTREND IN TICKET SIZE 16
FIG 7: BORROWER LEVERAGES 17
FIG 8: OVERALL WEEK-WISE COLLECTION AND DISBURSEMENTS 17
FIG 9: STATE WISE COLLECTION EFFICIENCY FOR PERIOD NOVEMBER 2016 TO
MID OF DECEMBER 2016 18
FIG 10: COLLECTION EFFICIENCY-WISE GROUPING OF DISTRICTS 18
TABLE 1: CRONBACH ALPHA 25
FIG 11: BOX PLOT TO IDENTIFY OUTLIERS 26
FIG 12: SKEWNESS FOR CASH IN WALLET BEFORE DEMONETISATION 27
FIG 13: SKEWNESS FOR CASH IN WALLET AFTER DEMONETISATION 28
FIG 14: SKEWNESS OF CASH SAVING BEFORE DEMONETISATION 29
FIG 15: SKEWNESS OF CASH SAVING BEFORE DEMONETISATION 30
FIG 16: SKEWNESS OF CASH EXPENDITURE BEFORE DEMONETISATION 31
FIG 17: SKEWNESS OF CASH EXPENDITURE AFTER DEMONETISATION 32
TABLE 2: PAIRED SAMPLE T TEST 33
TABLE 3: PAIRED SAMPLES CORRELATION 34
TABLE 4: PAIRED SAMPLES TEST 35
TABLE 5: MEAN RANKS 38
TABLE 6: DESCRIPTIVE STATISTICS 40
TABLE 7: WILCOXON TEST 42
TABLE 8: WILCOXON TEST – Z AND SIGNIFICANCE 45
FIG 18: GRAPH REPRESENTING CASH CARRIED BY PEOPLE BEFORE AND AFTER
DEMONETISATION 46
FIG 19: GRAPH REPRESENTING CASH EXPENDITURE BEFORE AND AFTER
DEMONETISATION 46
FIG 20: GRAPH REPRESENTING CASH SAVINGS BEFORE AND AFTER
DEMONETISATION 47
FIG 21 48
FIG 22 48
FIG 23 48
FIG 24 48
FIG 25 48
FIG 26 48
FIG 27 48
FIG 28 48

Abstract
The demonetization directive of November 8, 2016 by the Modi government resulted in 86
percent of currency notes becoming an illegal tender overnight. Microfinance Institutions
(MFI’s) are non-banking financial institutions involved in service of granting micro-loans
which are repaid over short intervals of time. The 55,000crore industry will be hugely
impacted as almost all transactions are carried out in cash. 66.84% of India’s population lies
in the rural areas and have an access to MFIs, hence this decision would impact a large
portion of the population in terms of the liquid cash they possess and the circulation of these
notes. Demonetisation has had a major shift in the mind-set of the average Indian who has
reprioritized his financial planning. The paper aims at studying the financial impact that
demonetization has had on the customers of these MFI’s and reviewing how this would have
an effect on loan recoveries. Our study has portrayed the change in the rural Indian’s life who
borrows money on a regular basis from the MFIs, before and after the demonetization
decision. We shall study the impact on customer savings, expenditure and loan repayment.
Introduction
[3,4]
On 8th November 2016, Prime Minister Modi announced that the notes of 500 and 1000
would cease to be legal tender. This was done in order to disrupt the black money market and
terrorism activities. Due to the unexpected nature of this declaration there was a prolong cash
shortage which threatened the economic output of the country. In the live announcement,
Modi declared that use of all 500 and 1000 bank notes will be invalid and announced that the
new notes of 500 and 2000 will be issued.
This wasn't the first-time demonetisation happened in India, in 1938 RBI printed Rs. 10000
notes but in January 1946, 10,000 notes along with 1000 and 5000 were demonetised. In
1970, the Government of India set up the WANCHOO Committee to suggest measures
against the black money. The committee suggested demonetisation but the news was leaked
and all the illegal hoarders quickly invested their money in assets and thus the plan failed.
During Morarji Desai tenure as Prime Minister in March 1977, the Janata Party decided to
withdraw 1000, 5000 and 10,000 notes to end back money transactions.

More than 86% of the circulation in cash was from the discontinued currency. Over 90% of
the transaction used to happen in cash. This move affected the 86% currency. The small
market traders, businessmen and farmers were affected the most due to the nature of their
work.
Background of Study
The demonetisation decision made on 8th November by the government affected the Indian
economy and people. The aim of this was to disrupt the black money market and terrorist
activities. Also, India where most of the transactions happen in cash, the lives and businesses
were affected which also led to failure of repayment of loans. Most of the NBFCs and MFIs
have already started experiencing defaults and this has led to an increase in loans being
categorized as non-performing assets. This study focuses on impact of demonetisation on
MFIs and each individual's cash flow (expenditure and savings).
Statement of Purpose/Problem Statement
Repercussions of the decision to demonetise Rs. 500 and Rs. 1000 notes are slowly being felt
on various industries across India. Our research aims to analyse the impact of this decision on
the Non-Banking Financial Sector and the Microfinance Industry. The research’s main focus
is twofold; first, to study the savings and expenditure of the customers of MFIs post the
demonetisation decision and second, to study the impact of this on MFIs.
Objective
There is a scope of research on the problems faced by the rural people as they constitute
68.84% of the India’s population and these people take loans from MFIs. This research
focuses on change in cash flow among people in rural India and how it has impacted the
repayment of loans to the MFIs. Also, this research will help us to analyse how people’s
priority on spending has changed post demonetisation.

Review of related literature
Demonetization is Spreading Around the Globe: -
[30]
International organisations, economists and leaders around the world watched this bold
experiment with a mix of worry and wonder. Countries such as Zimbabwe and Myanmar
tried their luck with demonetization in the past but with worrisome results. This trend was
carried forward by a number of countries around the world.
Australia
On December 14th, Australia banned its highest demonetization of $100 notes to act against
its shadow economy just like in the case of India.
Pakistan
On December 19th, Pakistan undertook a mission to fight stashing of illegal wealth and tax
evasion. The Government plans to phase out the Rs.5000 bills which account for 30% of the
currency in circulation over the next three to five years.
Venezuela
On December 11th, Venezuela demonetized its highest value 100-bolivar bill which
accounted for 77% of the cash in circulation. The Government gave its citizen a 72-hour
window which was later extended as a serious shortage of notes led to looting and violent
protests.
Impact on Various Sectors: -
[20]
Demonetisation has had an effect on the entire Indian economy including the functioning
of the various sectors like automobile, banking, retailers, NBFCs, MFIs, Gold, real estate and
agriculture.
Banking
The initial impact was high on the negative side but slowly things are getting better.
1. Disbursements have increased to 50-70% of usual levels.
2. Collection efficiency is back to 60-80% in contrast to 20% at the beginning.
NBFCs

[31]
NBFCs that offer vehicle and gold loans and microfinance have been negatively impacted
as collection is done on cash basis. We will look at this sector in detail.
Real Estate
[1]
Real estate agents say that there has been an almost 45% drop in enquiries and sales. Deals
in secondary market have come to a standstill i.e. the home renting sector has been reduced
significantly as customers are expecting price drops.
Ongoing projects are dealing with low funds and the projects are getting significantly
delayed.
Developing cities with unsold homes are facing lower demand and fall in capital values.
Transparency in the real estate system will increase as illegal purchasing will reduce due to
demonetisation.
Agriculture
[2]
Villages have adapted better than cities in some ways as he government of India allowed
tax free deposits of any amount for farmers. Many of the farmers received 20% premium
from traders while carrying out transactions. In villages, even after demonetisation Informal
credit for purchases as well as use of old notes kept the rural economy going. Demonetisation
had relatively low impact on crop planting and it remained higher than last period due to
good monsoon period. The future depends on the increase of cash in circulation.
Automobiles
People visiting showrooms have decreased. Most two wheelers are sold in rural areas and
will see the highest negative impact. Most passenger vehicles have not been affected due to
cash shortages as small percentage is purchased in cash. TATA motors and Mahindra and
Mahindra will see negative impact on their domestic automotive operations.
Fleet operators are experiencing cash issues on payments for checkpoints, late deliveries, etc
which will in turn have an impact on replacement sales.
Gold
80% of gold purchases in India are done on cash basis, hence the industry will definitely face
decline in the near term. Most of the small jewellery retailers are unorganised and deal in

cash, they will have to restructure their business models to accept non-cash payments. In the
long term organized jewellers will benefit.
Retailers
Retailing sector will have a positive impact in the long run. Retailers who are not equipped to
handle cash less transactions and are unorganised will face problems in the initial stage. But
with over time adapting to the needs and with the movement towards the cashless economy
there would be an increase in demand for organised retailers as most people will prefer to
purchase from them.
Immediate Impact on Banks
Demonetisation will lead to large amount of money being deposited in Savings and Current
Accounts of banks. This will increase the amount of money with the bank and this can be
later used to provide loans. There may also be some amount of withdrawals as individuals
would like to have money for household purposes.
Boom in Digital Transactions
[27]
Due to the move, cash is becoming scarce and new notes are penetrating into the market at
a slow pace, people are looking for alternatives. Digital transaction systems, E-wallets and
online banking will see a huge spike in usage. Companies like PayTM, MobiQwik and
Freecharge are seeing increase in usage as customers can continue to use everyday services
without parting with the limited cash at hand. This will lead to strengthening of systems and
better infrastructure in the long term.
A large amount of cash is expected to come under the formal banking system when citizens
deposit their old notes. Some part of this cash will be deposited as current account and
savings account deposits, reducing the bank’s dependency on borrowing funds. Due to the
lukewarm demand for credit, bank deposit rates are lowering.
[12]
SBI Chairman Arundhati Bhattacharya said, “All rates will fall. The bank has seen a huge
inflow of deposits but demand for credit has slowed down. Therefore, lending rates too will
fall but after a gap.”
Punjab National Bank, Bank of Baroda and Bank of India are looking to reduce deposit rates
in the near term.

Investment in financial products
Investors now believe that cash is not a safe asset and so will shift from physical to financial
assets where returns are higher.
More focus on NBFCs and MFIs
Indian financial sector comprises of commercial banks and non-banking financial companies.
These NBFCs offer services like chit-funds and loans which are different from Bank. NBFCs
are important to economy as 70% of India's population is in rural India. NBFCs accounted for
about 12.5% of India’s GDP in 2013 which grew from 8.4% as recorded in 2006.
NBFC sector beat banking sector in growth rate growing 22% every year. When India’s GDP
slowed down from 10.5% to 6.3% from 2010-11 to 2011-12, NBFCs recorded a growth of
25.7%. In terms of profitability NBFCs are more profitable than banks. The credit growth is
higher than the banking sector. Credit grew from 24.3% per year as for banks growth was
21.4% per year. NBFCs also contribute to economy by lending loans for infrastructure
projects, it is very important for a developing country like India. Also, NBFCs serve
customers both in urban and rural area. They help promote inclusive growth by helping small
scale companies finance their projects and providing small ticket loans for housing projects.
[14]
The Banking sector has a complex web of services with various implications on them due
to this move by the Government. These impacts will be seen over the next few months and it
would be difficult to make any comment on it at this moment. Also, banks offer a lot of
financial services unlike NBFCs and MFIs, which will have different impacts on each of
them. Thus, we have narrowed down our research area to only NBFCs and MFIs.
NBFCs And MFIs
In India, there are a large no. of micro finance companies which suit the needs of rural and
semi urban citizens; these include women, daily wage workers, small traders and retailers.
Some of these people don't have bank accounts and most of the transactions done by them are
in cash. Micro Financing Institutions provide such people with loans and collect repayments
on daily, weekly, monthly or quarterly basis. Demonetisation of specified bank notes has
temporarily slowed down the business transactions of MFIs and NBFCs.

[19,28]
Demonetisation has been a setback for the microfinance industry, which was in a revival
trajectory. After years of subdued growth, the MFI industry expanded more than 60 per cent
to Rs. 54,329 crore in 2015-16 compared to the previous year, according to a report prepared
by Sa-Dhan, the self-regulatory organisation of MFIs. The MFIs client base expanded by 2.8
million in the year, taking the total number of clients to 39.9 million, said the report. This
growth was despite the fact that Bandhan, which was the largest MFIs, moved out of the
space to become a full-fledged bank. But observers acknowledge that, demonetisation aside,
not everything is well with the sector. Microfinance is now becoming a potential site of an
emerging repayment crisis. It has much to do with the broader issue of excessive credit and
over-indebtedness.
Initial Reactions
[41]
Due to the fact these people do cash transactions, their daily lives and business has been
affected, which in turn leads to the failure of repayment of loans.
[25]
Most of the NBFCs and MFIs have already started experiencing defaults and this has led
to an increase in loans being categorized as non-performing assets. The situation is very
gloomy. Repayment has cascaded down to 30 per cent and in some places, it is reported to be
as low as 20 per cent.
[39]
MFIs rely on borrowing from banks for further lending of money because MFIs have
limited capital. The fact that people are not able to pay their instalments limits the MFIs
liquid resources and also forces them to withhold any further disbursement of loans.
[29]
According to CRISIL Credit report, Financial sector companies operating in cash intensive
business such as micro financing firms and NBFCs, may stave of liquidity pressure because
of undrawn lines of credit from banks and liquid assets. Also, RBI extended the deadline by
60 days for the repayment of loans running working capital accounts with banks with amount
less than 1 crore. This will include loans for housing, car, farm and agriculture purposes.
If in two weeks the normalcy is not restored then NBFCs will not be able to absorb the
disruption. Also, there is significant drop in collection into vehicle finance, microfinance and
gold finance.
Ground Reality
[17]
According to MR. Ratan Vishwanathan, CEO of Microfinance Institution Network,
despite demonetisation collection efficiency was good at 80%+ with two MFIs reporting

more than 90%+. MFIs operating under monthly repayment model received majority
collection in November because people had exchanged notes by 25th November.
[40]
The collection was low in Maharashtra and Uttar Pradesh due to confusion regarding
RBI’s dispensation on NPA recognition resulting in some borrowers politically misguided.
[32]
It was proposed to allow MFIs to collect old currency notes but RBI rejected it.
Pre-demonetization, MFIs collectively disbursed INR 2.2-2.3b/day. [34]
However, disbursals
have declined 45-50% since 8 November. MFIs have recycled collections into
disbursements as they have not been able to withdraw money from banks. Also, MFIs
have not been disbursing much electronically as borrowers are unable to withdraw enough
money from their bank accounts. While maximum withdrawal is INR 24,000 per week, there
is barely enough cash actually in circulation to meet this demand, especially in rural
geographies.
Impact of Demonetisation by BFIL
FIG 1: CUMULATIVE POSITION (POST DEMONETISATION)
Source: BFIL Update

FIG 2: COLLECTION EFFICIENCY OF BFIL
Source: BFIL Update
FIG 3: DISBURSEMENTS BY BFIL

FIG 4: COLLECTION EFFICIENCY OF BFIL
Source: BFIL Update
[24]
RBI's revised instructions for MFIs on classification of NPAs following demonetisation.
The RBI relaxed the income recognition norms by 60 days. A loan turns bad when a
borrower does not pay for 90 days, but the RBI has extended this period to 150 days for loans
to be repaid in November and December. In fact, this circular was meant for MFIs to enable
them to manage their portfolios which were being affected by temporary defaults on account
of the currency crisis. [11]
But political leaders issued statement saying that RBI had given a
repayment holiday and rumours started circulating that loans were being waived by the
government. Pamphlets, circulars, handouts and the portrayal of MFIs in negative colour by
the local media also compounded problems for MFIs.

FIG 5: BORROWING CYCLES
Source: Bloomberg Quint
MFIs might be required to make extra provisions for overdue loans because of cash flow
mismatch caused by demonetisation. According to India ratings more than ⅓ of microfinance
borrowers are already in their 4th or 5th borrowing cycles.
[33]
The first borrowing cycle is the first loan taken by a borrower. Generally, ticket size
increase when borrowing cycle increases.
FIG 6: UPTREND IN TICKET SIZE
Source: Ind-Ra

FIG 7: BORROWER LEVERAGES
Source: Ind-Ra
Bigger MFIs could be at a higher risk as most of their growth is due to the rise in ticket sizes
in small number of states. The report by India rating found that West Bengal is the highest
penetrated state in the country followed by Kerala, Karnataka and Tamil Nadu as measured
by no. of unique clients and Gross Loan Portfolios.
[15, 16]
Mithilendu Jha, Associate Director of India ratings said that demonetization may benefit
MFIs. Borrowers will be forced to move to formal bank accounts which could reduce
dependence on cash as a mode of disbursement and collection. MFIs need to change and
adapt to situations so that a single event does not disrupt their collections.
Impact on collections
Microfinance entities traditionally use cash in their lending and recovery operations. The
instalments on microfinance loans have weekly / fortnightly / monthly collections of small
denominations. On account of non-availability of cash post demonetization, the borrowers
were not in a position to service their loans which led to delay and drop in collection rates.
FIG 8: OVERALL WEEK-WISE COLLECTION AND DISBURSEMENTS
Source: CARE Ratings

FIG 9: STATE WISE COLLECTION EFFICIENCY FOR PERIOD NOVEMBER 2016 TO
MID OF DECEMBER 2016
FIG 10: COLLECTION EFFICIENCY-WISE GROUPING OF DISTRICTS

[15,16]
For the first 2 weeks following the announcement of demonetization, the collection ratio
declined to 80%. Subsequent increased in supply of new currencies by RBI had led to
increase in collections in the fourth week. [35]
But the collections have come down
subsequently due to slowdown in business activities of the borrowers and dispensation
provided by RBI (earlier by 60 days and later increased to 90 days) to financial institutions in
terms of recognizing NPAs. [37, 36]
This special consideration was misrepresented to the
borrowers by local influential individuals and thus resulted in fall in collection efficiency in
few areas of states like Uttar Pradesh, Maharashtra and Madhya Pradesh (exhibited in Table -
3).
Impact on Lending
[15,16]
Majority of the disbursement was cash based because of the withdrawal limit was set on
the bank accounts. The ratio of disbursements to collections fell to around 30% by the second
week of December 2016. The main reason for this significant drop in disbursements was due
to the focus of MFIs shifting from disbursements to collections and they also adopted a wait
and watch approach in order to comprehend the position.
Post Demonetization, MFIs Looking to Digitize
[9]
India’s Rs. 65,000-crore microfinance industry is finding ways to come up with low-cost
models for payment. [22]
Varam Capital has implemented a pilot project for payment via
mobile top up or recharge. Microfinance players are looking to biometric low-cost
smartphones for collecting payments. [3]
It is crucial to keep costs low. PoS (Point of sale)
machines come with an MDR (merchant discount rate) of 2.5%. Since the payments are as
low as Rs. 50-Rs. 200 a week, they have to look at low-end digitisation modes. Varam
Capital’s pilot project has deployed Samsung's biometric phones.
[22]
Chaitanya MicroFinance has started mapping bank accounts to Aadhar number to directly
deposit the loan amount into receiver's account.

Methodology
Description of Research Design and Procedure Used
To properly understand the situation, our research requires both a quantitative and a
qualitative perspective. We have 2 methods of data collection:
1. Questionnaire for individuals who have had past experience in transactions with
NBFCs/MFIs
2. Interviews of Employees working in NBFCs/MFIs
The questionnaire aims to help us get relevant information about people who take loans from
these institutions. This is the crux of our research as it will help us identify important
variables to determine correlation between them. The interviews conducted of employees will
help us get actual data and insights of the impact felt by them.
Sources of Data
People who have taken loans from NBFCs located in - Vithalwadi
Employees of MFIs in DCB Bank, Gramin Bank and Fullerton India
Sampling Procedure
To gather primary data for our research we will carry out the sampling for 2 different
populations:
1. Individuals - From the population of people who have taken loans from MFIs we will
use convenience sampling to select our subjects.
2. Employees of MFIs - Having some contact in the industry, we have existing study
subjects as our first point of contact. These subjects can help us recruit future subjects
from their co-workers thus growing our sample using the snowball sampling
technique.

Method and Instrument of Data Gathering
The instrument of data gathering will be simple questionnaires and informal interviews. The
questionnaire comprises of all the data required by us to prove/disprove our hypothesis. The
informal interviews with employees of NBFCs and MFIs will be open ended so that we can
get a better understanding of the actual problems faced by them after demonetisation.
The various parameters being considered are
1. Lending
a. Income group of Borrowers
b. Ticket Size
c. Purpose of Loan
d. Interest Rate offered
e. Medium of Disbursement
i. Cash
ii. Cheque
iii. Online Account Transfer
f. Collection Period
g. Number of Loans per family
2. Borrowing
a. Frequency of Borrowing
b. Amount Borrowed
c. Rate of Interest
d. Bank Repayment Period
e. Number of Bank Partners
3. Information Dissemination
a. Frequency
b. Type of Information

Analysis and Result
Questionnaire
Questionnaire of Individuals:
1. What is your gender?
2. What is your Occupation?
3. Which income bracket do you fall in? (In Thousands)
Open ended Questions:
1. How much cash did you carry in your wallet before demonetisation?
2. How much cash do you carry in your wallet after demonetisation?
3. On an average how much cash did you save before demonetisation? (per month)
4. On an average how much cash do you save after demonetisation? (per month)
5. On an average how much was your cash expenditure before demonetisation? (per
month)
6. On an average how much is your cash expenditure after demonetisation? (per month)
7. How did you repay loan amount before demonetisation?
8. How did you repay loan amount after demonetisation?
Ranking Scale Question:
Rank your Priorities in terms of expenditure before demonetisation:
a. Food
b. Travel
c. Entertainment
d. Household Essentials
e. Clothing
f. Mobile Recharge
g. Savings
Rank your Priorities in terms of expenditure after demonetisation:
a. Food
b. Travel
c. Entertainment
d. Household Essentials
e. Clothing

f. Mobile Recharge
g. Savings
Likert Scale Questions:
1. How satisfied were you with the support and guidance provided by your MFI before
demonetisation?
2. How satisfied are you with the support and guidance provided by your MFI after
demonetisation?
3. How satisfied were you with the information updates provided by your MFI before
demonetisation?
4. How satisfied are you with the information updates provided by your MFI after
demonetisation?
5. How satisfied were you with the overall performance of your MFI before
demonetisation?
6. How satisfied are you with the overall performance of your MFI after
demonetisation?
7. How likely were you to repay your loan amount on time before demonetisation?
8. How likely are you to repay your loan amount on time after demonetisation?
Scale for Satisfaction Questions:
1. Very Unhappy
2. Unhappy
3. Neutral
4. Happy
5. Very Happy
Scale for Likely Question:
1. Very Unlikely
2. Unlikely
3. Neutral
4. Likely
5. Very Likely

Questionnaire for MFI Employees:
Open ended Questions:
1. What was your rate of interest for loans before Demonetisation?
2. What is the difference in interest rate post Demonetisation?
3. Majority of the loan takers took what type of loan before Demonetisation?
4. Majority of the loan takers took what type of loan after Demonetisation?
5. At what interest rate did your MFI take loan from the Bank Partners before
Demonetisation?
6. At what interest rate did your MFI take loan from the Bank Partners after
Demonetisation?
7. What percentage of people repaid their loans successfully on a monthly basis before
Demonetisation?
8. What percentage of people repaid their loans successfully on a monthly basis after
Demonetisation?
9. Did your MFI support digital/online loan disbursement and repayment before
demonetisation?
10. Did your MFI support digital/online loan disbursement and repayment after
demonetisation?
11. What was the collection period of loan before demonetisation?
12. What was the collection period of loan after demonetisation?
Interval Scale Questions:
1. What is the ticket size per loan offered before Demonetisation?
2. What is the ticket size per loan offered after Demonetisation?
Intervals: (0-10000, 10000-20000, 20000-30000, 30000-40000, 40000+)
3. Majority of your loans before demonetisation were taken by which of the following
income group? (Figures in Thousands/Month)
4. Majority of your loans before demonetisation were taken by which of the following
income group? (Figures in Thousands/Month)
Intervals: (Below 5, 5-10, 10-15, 15-20, 20-25)
Likert Scale Question:
1. How likely is your MFI to switch to digital/online mediums for loan transactions in
the calendar year 2017?

Analysis
Cronbach Alpha
Cronbach alpha is a measure of internal consistency, which is how closely related a set of
items are as a group. It is a measure of scale reliability. The internal consistence is considered
acceptable if the value of Cronbach’s alpha is above 0.7.
The value of Cronbach’s alpha for our likert scale questions is 0.818 which lies in the good
internal consistency region hence the data for these questions are acceptable.
Reliability Statistics
Cronbach's Alpha
Cronbach's Alpha Based on
Standardized Items
N of Items
.818 .822 8
TABLE 1: CRONBACH ALPHA
Hypothesis
H0: Demonetisation had no effect on cash flow thereby having no effect on the repayment of
loans to NBFCs and MFIs
H1: Demonetisation reduced cash flow and repayment of loans

Box Plot
It’s a simple way of representing statistical data on a plot in which a rectangle is drawn to
represent the second and third quartiles, usually with a vertical line inside to indicate the
median value. The lower and upper quartiles are shown as horizontal lines on either side of
the rectangle. Outliers are the numbers that exist outside of the plot. We used the box plot for
the questions to identify the outliers from our data.
Thus, we have 2 outliers for the cash in wallet before demonetisation question and 4 outliers
for the cash in wallet post demonetisation question.
FIG 11: BOX PLOT TO IDENTIFY OUTLIERS

Normal Distribution and Skewness
Skewness is a measure of asymmetry of the probability distribution of a real-valued random
variable about its mean. Its value can be negative or positive, or even undefined. For a
distribution to be normally distributed the skewness value must lie between -1 to +1 which is
considered acceptable.
Question: On a normal day, how much cash did you carry in your wallet before
demonetisation?
Skewness: 0.9526896
FIG 12: SKEWNESS FOR CASH IN WALLET BEFORE DEMONETISATION

Question: How much cash are you carrying in your wallet currently (post demonetisation)?
Skewness: 0.9698154
FIG 13: SKEWNESS FOR CASH IN WALLET AFTER DEMONETISATION

Question: On an average how much cash did you save before demonetisation per month?
Skewness: 0.9787121
FIG 14: SKEWNESS OF CASH SAVING BEFORE DEMONETISATION

Question: On an average how much cash are you saving now per month (post
demonetisation)?
Skewness: 0.9518426
FIG 15: SKEWNESS OF CASH SAVING BEFORE DEMONETISATION

Question: On an average how much was your cash expenditure before demonetisation per
month?
Skewness: -0.0569718
FIG 16: SKEWNESS OF CASH EXPENDITURE BEFORE DEMONETISATION

Question: On an average how much is your cash expenditure post demonetisation per month?
Skewness: -0.1698988
FIG 17: SKEWNESS OF CASH EXPENDITURE AFTER DEMONETISATION

Paired Sample T-Test
The paired sample t-test compares the means between two related groups on the same
continuous, dependent variable. The four assumptions to run a t-test are:
1. Dependent Variable should be measured on a continuous scale.
2. Independent Variable should consist of two categorical, related groups or matched pairs.
3. There should be no significant outliers.
4. The data should be normally distributed.
Paired Samples Statistics
Mean N Std. Deviation
Std. Error
Mean
Pair 1
Before
Wallet
725.00 26 419.345 82.240
After Wallet 462.69 26 318.416 62.446
Pair 2
Before
Savings
3093.33 30 3241.374 591.791
After
Savings
3281.67 30 3148.111 574.764
Pair 3
Before Exp 8163.33 30 3729.332 680.880
After Exp 7576.67 30 3469.243 633.394
TABLE 2: PAIRED SAMPLE T TEST

Paired Samples Correlations
N Correlation Sig.
Pair 1
Before Wallet &
After Wallet
26 .960 .000
Pair 2
Before Savings
& After Savings
30 .997 .000
Pair 3
Before Exp &
After Exp
30 .993 .000
TABLE 3: PAIRED SAMPLES CORRELATION

Paired Samples Test
Paired
Differences
t df
Sig. (2-
tailed)
Mean
Std.
Deviat
ion
Std.
Error
Mean
95%
Confiden
ce
Interval
of the
Differenc
e
Lower
Upp
er
Pair 1
Before
Wallet -
After Wallet
262.30
8
144.1
47
28.270
204.0
85
320.5
30
9.27
9
2
5
.00
0
Pair 2
Before
Savings -
After
Savings
-
188.33
3
278.7
54
50.893
-
292.4
22
-
84.24
5
-
3.70
1
2
9
.00
1
Pair 3
Before Exp -
After Exp
586.66
7
489.7
10
89.408
403.8
06
769.5
27
6.56
2
2
9
.00
0
TABLE 4: PAIRED SAMPLES TEST

Friedman Test, Wilcoxon Test and Bonferroni Correction
The Friedman test is used to compare the mean ranks between the related groups and
indicates how the groups differed. Also, we need to run separate Wilcoxon signed-rank test to
examine where the difference actually occurs on different combinations of related groups.
We used Bonferroni adjustment on the results from the Wilcoxon tests because we are
making multiple comparisons, which make it more likely that we will declare a result
significant when we should not. The Bonferroni adjustment is done by dividing the
significance level dividing by the number of tests.
Hypotheses for Bonferroni:
1.
H0: Demonetization had no significant effect on priority of food for an individual
H1: Demonetization had significant effect on priority of food for an individual
2.
H0: Demonetization had no significant effect on priority of travel for an individual
H1: Demonetization had significant effect on priority of travel for an individual
3.
H0: Demonetization had no significant effect on priority of entertainment for an individual
H1: Demonetization had significant effect on priority of entertainment for an individual
4.
H0: Demonetization had no significant effect on priority of household essentials for an
individual
H1: Demonetization had significant effect on priority of household essentials for an
individual
5.
H0: Demonetization had no significant effect on priority of clothing for an individual

H1: Demonetization had significant effect on priority of clothing for an individual
6.
H0: Demonetization had no significant effect on priority of mobile recharge for an individual
H1: Demonetization had significant effect on priority of mobile recharge for an individual
7.
H0: Demonetization had no significant effect on priority of savings for an individual
H1: Demonetization had significant effect on priority of savings for an individual
Ranks
Mean Rank
Rank your priorities in terms of expenditure before demonetisation? [Food] 3.65
Rank your priorities in terms of expenditure before demonetisation? [Travel] 7.93
Rank your priorities in terms of expenditure before demonetisation?
[Entertainment]
10.23
Rank your priorities in terms of expenditure before demonetisation?
[Household Essentials]
5.10
Rank your priorities in terms of expenditure before demonetisation? [Clothing] 9.05
Rank your priorities in terms of expenditure before demonetisation? [Mobile
Recharges]
9.10
Rank your priorities in terms of expenditure before demonetisation? [Savings] 7.37
Rank your priorities in terms of expenditure after demonetisation? [Food] 4.07
Rank your priorities in terms of expenditure after demonetisation? [Travel] 8.20

Rank your priorities in terms of expenditure after demonetisation?
[Entertainment]
10.97
Rank your priorities in terms of expenditure after demonetisation? [Household
Essentials]
5.82
Rank your priorities in terms of expenditure after demonetisation? [Clothing] 9.78
Rank your priorities in terms of expenditure after demonetisation? [Mobile
Recharges]
9.00
Rank your priorities in terms of expenditure after demonetisation? [Savings] 4.73
TABLE 5: MEAN RANKS
Descriptive Statistics
N Mean
Std.
Deviati
on
Minimum Maximum
Percentiles
25th 50th 75th
Rank your priorities in
terms of expenditure
before demonetisation?
[Food]
30 2.00 1.857 1 7 1.00 1.00 2.25
[Travel]
30 4.03 2.076 1 7 2.00 4.00 6.25
[Entertainment]
30 5.17 1.744 2 7 3.00 6.00 7.00
30 2.73 1.363 1 6 2.00 2.50 3.25
30 4.67 1.749 1 7 3.75 5.00 6.00

[Clothing]
[Mobile Recharges]
30 4.63 1.790 1 7 3.00 5.00 6.00
[Savings]
30 3.80 1.750 1 7 2.00 4.00 5.00
after demonetisation?
[Food]
30 2.17 1.859 1 7 1.00 1.00 3.00
[Travel]
30 4.27 2.067 1 7 2.00 4.00 6.25
[Entertainment]
30 5.57 1.431 2 7 5.00 6.00 7.00
30 3.10 1.423 1 7 2.00 3.00 4.00
[Clothing]
30 4.97 1.586 1 7 4.00 5.00 6.00
[Mobile Recharges]
30 4.60 1.589 1 7 3.00 5.00 6.00

[Savings]
30 2.50 1.526 1 7 1.75 2.00 3.00
TABLE 6: DESCRIPTIVE STATISTICS
Ranks
N Mean Rank Sum of Ranks
[Food] - Rank your
priorities in terms of
expenditure before
demonetisation? [Food]
Negative
Ranks
2a
1.50 3.00
Positive
Ranks
3b
4.00 12.00
Ties 25c
Total 30
[Travel] - Rank your
expenditure before
demonetisation?
[Travel]
Negative
Ranks
6d
9.83 59.00
Positive
Ranks
11e
8.55 94.00
Ties 13f
Total 30
[Entertainment] - Rank
your priorities in terms
of expenditure before
demonetisation?
[Entertainment]
Negative
Ranks
3g
5.67 17.00
Positive
Ranks
9h
6.78 61.00
Ties 18i
Total 30

- Rank your priorities in
Negative
Ranks
5j
9.50 47.50
Positive
Ranks
11k
8.05 88.50
Ties 14l
Total 30
[Clothing] - Rank your
expenditure before
demonetisation?
[Clothing]
Negative
Ranks
4m
8.88 35.50
Positive
Ranks
10n
6.95 69.50
Ties 16o
Total 30
[Mobile Recharges] -
[Mobile Recharges]
Negative
Ranks
7p
6.71 47.00
Positive
Ranks
6q
7.33 44.00
Ties 17r
Total 30
[Savings] - Rank your
expenditure before
Negative
Ranks
18s
11.61 209.00
Positive
Ranks
3t
7.33 22.00
Ties 9u
Total 30

demonetisation?
[Savings]
TABLE 7: WILCOXON
TEST

a. Rank your priorities in terms of expenditure after demonetisation? [Food] < Rank your priorities in
terms of expenditure before demonetisation? [Food]
b. Rank your priorities in terms of expenditure after demonetisation? [Food] > Rank your priorities in
c. Rank your priorities in terms of expenditure after demonetisation? [Food] = Rank your priorities in
d. Rank your priorities in terms of expenditure after demonetisation? [Travel] < Rank your priorities in
terms of expenditure before demonetisation? [Travel]
e. Rank your priorities in terms of expenditure after demonetisation? [Travel] > Rank your priorities in
f. Rank your priorities in terms of expenditure after demonetisation? [Travel] = Rank your priorities in
g. Rank your priorities in terms of expenditure after demonetisation? [Entertainment] < Rank your
priorities in terms of expenditure before demonetisation? [Entertainment]
h. Rank your priorities in terms of expenditure after demonetisation? [Entertainment] > Rank your
i. Rank your priorities in terms of expenditure after demonetisation? [Entertainment] = Rank your
j. Rank your priorities in terms of expenditure after demonetisation? [Household Essentials] < Rank your
priorities in terms of expenditure before demonetisation? [Household Essentials]
k. Rank your priorities in terms of expenditure after demonetisation? [Household Essentials] > Rank your
l. Rank your priorities in terms of expenditure after demonetisation? [Household Essentials] = Rank your
m. Rank your priorities in terms of expenditure after demonetisation? [Clothing] < Rank your priorities in
terms of expenditure before demonetisation? [Clothing]
n. Rank your priorities in terms of expenditure after demonetisation? [Clothing] > Rank your priorities in
o. Rank your priorities in terms of expenditure after demonetisation? [Clothing] = Rank your priorities in
p. Rank your priorities in terms of expenditure after demonetisation? [Mobile Recharges] < Rank your
priorities in terms of expenditure before demonetisation? [Mobile Recharges]
q. Rank your priorities in terms of expenditure after demonetisation? [Mobile Recharges] > Rank your
r. Rank your priorities in terms of expenditure after demonetisation? [Mobile Recharges] = Rank your
s. Rank your priorities in terms of expenditure after demonetisation? [Savings] < Rank your priorities in

Test Statisticsa
Rank
your
priorities
in terms
of
expenditu
re after
demoneti
sation?
[Food] -
Rank
your
priorities
in terms
of
expenditu
re before
demoneti
sation?
[Food]
Rank
your
priorities
in terms
of
expenditu
re after
demoneti
sation?
[Travel] -
Rank
your
priorities
in terms
of
expenditu
re before
demoneti
sation?
[Travel]
Rank
your
priorities
in terms
of
expenditu
re after
demoneti
sation?
[Entertai
nment] -
Rank
your
priorities
in terms
of
expenditu
re before
demoneti
sation?
[Entertai
nment]
Rank
your
priorities
in terms
of
expenditu
re after
demoneti
sation?
[Househo
ld
Essential
s] - Rank
your
priorities
in terms
of
expenditu
re before
demoneti
sation?
[Househo
ld
Essential
s]
Rank
your
priorities
in terms
of
expenditu
re after
demoneti
sation?
[Clothing
] - Rank
your
priorities
in terms
of
expenditu
re before
demoneti
sation?
[Clothing
]
Rank
your
priorities
in terms
of
expenditu
re after
demoneti
sation?
[Mobile
Recharge
s] - Rank
your
priorities
in terms
of
expenditu
re before
demoneti
sation?
[Mobile
Recharge
s]
Rank your
priorities in terms
of expenditure after
demonetisation?
[Savings] - Rank
your priorities in
terms of
expenditure before
demonetisation?
[Savings]
Z -1.225b
-.838b
-1.767b
-1.083b
-1.086b
-.106c
-3.286c
Asymp. Sig.
(2-tailed)
.221 .402 .077 .279 .277 .915 .001

TABLE 8: WILCOXON TEST – Z AND SIGNIFICANCE
According to the Bonferroni correction, Savings is the only significant variable and hence we
accept the first 6 null hypotheses (H0) and reject it for the 7th
i.e. we accept the alternate
hypothesis:
H1: Demonetization had significant effect on priority of savings for an individual
According to the Paired Samples T-Test and Wilcoxon’s correction, we see that savings has
had an increase but expenditure has gone down which has in-turn affected overall cash flow
of an individual. By the responses received we also see that people are not likely to repay
their loans to their respective MFIs even though they have their savings (more light is shed on
this in the conclusion). Due to these factors, we reject the null hypothesis and accept the
alternate hypothesis:
H1: Demonetisation reduced cash flow and repayment of loans
Elementary Analysis
People carried less cash with them in their wallets on a daily bases post demonetisation as
seen from the graph in Fig 18. The inverse relation between expenditure and savings holds
true as seen from the graphs in Fig 19 and Fig 20. Savings increased slightly post
demonetisation as expenditure decreased.
a. Wilcoxon Signed Ranks Test
b. Based on negative ranks.
c. Based on positive ranks.

FIG 18: GRAPH REPRESENTING CASH CARRIED BY PEOPLE BEFORE AND AFTER
DEMONETISATION
FIG 19: GRAPH REPRESENTING CASH EXPENDITURE BEFORE AND AFTER
DEMONETISATION

FIG 20: GRAPH REPRESENTING CASH SAVINGS BEFORE AND AFTER
DEMONETISATION

FIG 21 FIG 22
FIG 23 FIG 24
FIG 25 FIG 26
FIG 27 FIG 28
Legend

Summary and Conclusions
Restatement of Problem
Repercussions of the decision to demonetise Rs. 500 and Rs. 1000 notes are slowly being felt
on various industries across India. Our research aims to analyse the impact of this decision on
the Microfinance Industry. The research’s main focus is twofold; first, whether the smaller
institutions will be able to function as they have in the past or will they have to adapt to the
situation by upgrading their technology/merging with other players or will they fail to adapt
to changes and eventually dissolve. Second, the impact on customers of MFIs.
Description of Procedures
To properly understand the situation, our research requires both a quantitative and a
qualitative perspective. We have 2 methods of data collection: Questionnaire for individuals
who have had past experience in transactions with MFIs and Interviews of Employees
working in MFIs.
The questionnaire aims to help us get relevant information about people who take loans from
these institutions. This is the crux of our research as it will help us identify important
variables to determine correlation between them. The interviews conducted of employees will
help us get actual data and insights of the impact felt by them.
To gather primary data for our research we will carry out the sampling for 2 different
populations: Individuals - From the population of people who have taken loans from MFIs we
will use convenience sampling to select our subjects and Employees of MFIs - Having some
contact in the industry, we have existing study subjects as our first point of contact. These
subjects can help us recruit future subjects from their co-workers thus growing our sample
using the snowball sampling technique.
We also calculated Cronbach's alpha which is a measure of internal consistency i.e. how
closely related a set of items are as a group. For analysis, we carried out the paired sample t-
test which compares the means between two related groups on the same continuous,
dependent variable.

Major Findings
● On an average the money carried by people in their wallets decreased by Rs. 262 post
demonetisation.
● On an average the savings of people have gone up by Rs. 188 post demonetisation.
● On an average the expenditure of people has reduced by Rs. 586 post demonetisation.
● Savings as a priority has increased for 60% of the respondents post demonetisation.
● The average change in interest rates post demonetisation compared to before
demonetisation was a decrease of 0.964%.
● 5 of the interviewed MFI’s reduced their ticket size.
● There was a minimal change in the interest rate offered to these MFI’s by the Banks
between pre and post demonetisation.
● Majority of the MFI’s are likely to incorporate digital/online mediums for loan
transactions.
● There was a drop in the percentage of loan repayment between before and after
demonetisation
Conclusion and Implications
Demonetisation has changed the mind-set of the rural Indian. Their savings have increased
post demonetisation mainly due to decrease in unnecessary expenditure and a shift in their
financial priorities by giving more importance to savings. However, this increase in cash
amongst customers has not made them pay their MFI loans as their readiness to repay the
loans on time has reduced and so has the loan collection data from MFIs. This situation is
strange and against the logical trend. However, we feel that the customers are waiting for
interest rates to reduce further. Indians have a tendency of doing everything last minute and
after the first 90 day repayment extension period, these customers are expecting another
extension notice. People in Maharashtra have been influenced by political parties who have
miscommunicated to them that the loans need not to be repaid. Savings of these people has
increased but has been transferred to their Jan Dhan accounts and is not in liquid cash form.
Hence, they are unable to repay their loans as the MFIs do not support digital transactions.
Demonetisation has had a positive impact on increasing the savings of people, however the
MFIs currently do not have the digital infrastructure to capture this opportunity.

Limitations of Study
With the limited resources we had travelling to rural areas to find the perfect sample of
respondents was a difficult task since our sample specifically required to be people from rural
India who have taken loans from MFIs before the event of demonetisation.
Scope of Future Research
Since demonetisation has happened very recently, there is immense scope of research as time
goes on. NPCI on February 22, 2017 announced a new project that will be working towards
digitising MFIs in the near future, this broadens the scope of research as new parameters
come in play.

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