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

Covid-hurt Maharashtra focuses on healthcare

Maharashtra, among the worst Covid-affected states, has allocated Rs 7,500 crore for construction and upgradation of health institutions over four years, and provided Rs. 5,000 crore for quality health services in the municipal councils and nagar panchayats over five years. Moreover, post-Covid counseling

The year of living dangerously

India and the Pandemic: The First Year Essay from The India Forum Orient BlackSwan, 335 pages, Rs 695 It’s about time for the first anniversary. Just around this time last year, we were wondering about the virus. We thought it is just one of tho

Celebrating the spirit woman with UN designated 14th Edition of the International Women’s Day Awards

Public Diplomacy Forum, in association with Tatsat Foundation, Business World and Governance Now is hosting "International Women`s Day Awards" for the true celebration of "STREE SHAKTI." This is a much-anticipated calendar event in New Delhi in its 14th edition which is a celebration of

BFSI Needs Military-grade Cybersecurity Solutions to Detect the Most Advanced Attacks: Deloitte

In such unprecedented times, businesses are facing different kinds of risk, which has

“New guidelines suppress digital, social media, and OTT platforms”

The government’s recent notification to regulate digital media is an attempt to suppress all social media platforms including digital news platforms, Dr. Shama Mohamed, Congress Spokesperson, has said. Only digital news platforms are able to say what they want to say, so the government

Covaxin Phase 3 clinical trial shows 81% efficacy

India’s first indigenously produced Covid-19 vaccine, Covaxin, has shown an interim efficacy of 81% in Phase III trials for preventing the virus. Covaxin has been developed in India jointly by the Indian Council of Medical Research (ICMR) along with Bharat Biotech International Limited (BBIL). &

Visionary Talk Series with Dr. Shama Mohamed On the present state of Governance



Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter