Demonetisation may delay Indian banks’ asset-quality recovery: Fitch

Most state banks have already indicated publicly that loan recovery has been affected

GN Bureau | February 2, 2017


#Banks   #Banking   #Demonetisation   #Fitch  


Demonetisation is likely to push back the recovery in Indian banks' asset quality, given the disruptive impact that cash shortages have had on the country's large informal economy, said Fitch Ratings.

Cash shortages caused by the demonetisation of large-denomination currency notes have affected the income of many borrowers - by holding back economic activity - and reduced their short-term repayment abilities. The Reserve Bank of India has allowed forbearance on some loans to the agricultural sector and small businesses, but this account for a relatively small share of outstanding lending.

The impact of demonetisation on asset quality is likely to only start showing up significantly in data for the January-March quarter. However, most state banks have already indicated publicly that loan recovery has been affected.

Read: Demonetisation will not have a big bang impact: Experts

Fitch had previously expected the stressed-asset ratio for Indian bank to increase to 12% in the financial year to 31 March 2017 (FY17), from 11.4% in FY16. There is now a risk that the ratio will climb higher.

We still believe that asset-quality indicators are close to their weakest level and will recover slowly over the next few years, but any turnaround is likely to have been pushed back by at least two quarters, it added.

Demonetisation has also weighed on loan growth, at least in the short term. Loan demand has weakened in the uncertain economic environment and banks have had to focus on cash management instead of normal lending activities. Mortgage lending is likely to be affected, with home sales down by 44% YoY last quarter. Loan growth slowed to 4.8% in November 2016, from 6.7% in October. We now think it is likely that loan growth will be below our previous forecast of 10% in FY17 and may even slow from the 8.8% recorded in FY16.

Read: Demonetisation severely imperilled India’s economy: Harvard Business Review

It is still possible that demonetisation will support loan growth over the longer term. Indian banks have received a surge of low-cost funding as demonetised notes have been deposited. Deposit growth accelerated to 15.9% YoY in November, from 9.2% in October, and the handful of banks that have released figures for the October-December quarter have reported low-cost deposit growth of 25%-30% YoY. Some banks have already responded by lowering lending rates - by up to 90bp in State Bank of India's case - which could help revive credit demand, particularly if there are further cuts.

We think there is scope for further lending rate cuts, but much will depend on the proportion of new deposits that remains in the banking system. Tight restrictions on cash withdrawals were imposed at the start of demonetisation and have so far been relaxed only slightly. The lasting impact on bank deposits - and lending rates - will become clear only after withdrawal limits are lifted.

Furthermore, lending growth is likely to remain constrained by other factors. Excess capacity and the large number of stalled projects across much of the industrial sector will limit loan demand from capital-intensive businesses. The under capitalisation of state-owned banks will also hold back lending.
 

Comments

 

Other News

Government sanctions new posts to hire cyber security professionals

The government has sanctioned 111 posts of cyber security professionals for the Indian computer emergency response team (ICERT) under the ministry of electronics and information technology (MEITY), according to a ministry official, who added that the posts were sanctioned earlier this year. 

Bhutan’s pursuit of happiness, shortage of health sub-centres in UP, and role of digitisation in IGNOU

In many ways the story of Gross National Happiness in a country is the story of Bhutan and its modern history. There are two major transition points in Bhutan’s recent history, the beginning of the monarchy in 1907, and the transition to a Constitutional monarchy in 2008, and the pursuit of happine

Do you agree with the ban on the sale of cattle for slaughter through animal markets?

Do you agree with the ban on the sale of cattle for slaughter through animal markets?

Modi inaugurates India’s longest bridge in Assam

  Prime minister Narendra Modi celebrated three-year of his government on May 26 by inaugurating Dhola-Sadiya bridge over the Brahmaputra river in Assam’s Tinsukia district. It is the longest bridge in India, which runs 9.15 km from end to end and connects Assam with Arunachal Pradesh.

IndianOil registers highest ever profit of Rs 19,106 crore

 IndianOil posted a net profit of Rs 19,106 crore for 2016-17 fiscal as compared to a profit of Rs 11,242 crore in the last fiscal. The income from operations for the financial year 2016-17 was Rs 4,45,373 crore as compared to Rs 4,06,828 crore in the previous fiscal. IndianOil`s income from

Maiden flight of HAL’s light utility helicopter

 Hindustan Aeronautics Limited (HAL) carried out first flight of light utility helicopter (LUH)-PT-2 on May 22 at its Bengaluru-based facility. The flight duration was about 22 minutes and pilots reported nil snag, HAL said.   “These maiden flights of indig



Video

कालेधन पर किया हुआ अपना वादा पूरा करूंगा - मोदी

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter