Basic principle of banking: Borrow at low interest and lend at higher interest; run the show with the earnings.
Elaborating
I deposit Rs.100/- in a bank. The bank promises to give me Rs.104/- at the end of 1 year. So that’s 4% interest. In the mean time, the bank might lend that 100 to a someone else at an interest of 11% and get back Rs.111/- at the end of 1 year. So the bank is earning Rs.7/- from my Rs.100/-.
After Demonetization of Rs.1000 and Rs.500 notes
People are depositing money they’ve stored in those denominations. As of current estimates, a total of 7Lakh crore rupees have entered the banks due to this operations. Another side-effect is that some businessmen/industrialists are seeing decreased purchases and reduced business. Reduced business causes lower revenues/profits which means banks may not be able to recover the monthly EMIs from these borrowers. That also means that the bank should pay interest of SB account holders out of its own pocket.
Assuming that the people withdraw their money 1 year after depositing it into the bank, won’t the banks be hard pressed for cash due to a staggering business environment? Will the banks pay SB account interest based on future promised EMIs?
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