Most state banks have already indicated publicly that loan recovery has been affected
GN Bureau | February 2, 2017
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.
Dark Secrets: Politics, Intrigue and Proxy Wars in Kashmir By Iqbal Chand Malhotra Bloomsbury, 277 pages With his latest work, ‘Dark Secrets’, scholar and media personality Iqbal Chand Malhotra continues the investigation he began with
Maharashtra has announced the reopening of schools for classes 1-12 from January 24 with Covid protocols. Education minister Varsha Gaikwad said on Thursday that the government will reopen schools for classes 1-12th with Covid protocols from January 24. “We have also decided to open p
The BrihanMumbai municipal corporation (BMC) has rejected BJP MLA Ameet Satam’s demand in a letter to BMC commissioner Iqbal Chahal to cancel the appointment of Sunil Rathod, deputy chief engineer, building and proposal department, western suburbs, for getting caught red-handed accepting bribe by ACB
Once the schedule for the next assembly elections has been announced, there is a flurry of activity around building caste coalitions. This is more intense in the most populous state, Uttar Pradesh, which is the most important state in India in any election, in view of its large population estimated a
In a competition organised by the Ministry of Housing and Urban Affairs (MoHUA), Pune, Pimpri-Chinchwad, Nagpur and Aurangabad from Maharashtra are among the 11 cities selected for scaling up their pilot projects and creating permanent public infrastructure. #Streets4People Challenge was org
The three Navy personnel who succumbed to injuries caused by an explosion on board Indian Navy`s destroyer ship INS Ranvir have been identified as Krishan Kumar MCPO (master petty chief officer)I, Surinder Kumar MCPO II & AK Singh MCPO II. In a condolence message, Admiral R Hari Kumar s