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

In times of Corona, think twice before forwarding soc media posts

Amid exceptional circumstances of COVID-19 outbreak and the 21-day nationwide lockdown, authorities are trying to discourage spread of rumours and misinformation through social media. Maharashtra Cyber Police came out with an advisory for WhatsApp users and admins during the COVID-19, even

Mumbai hospitals shut as more and more healthcare workers test positive

Maharashtra has emerged the epicentre of the Novel Coronavirus outbreak in the country with Mumbai reporting the highest number of cases in the state. With more and more healthcare providers getting infected, hospitals are becoming the hotbeds of virus perpetuation. On Monday Wockhardt hosp

As nation lighted lamps, power grid delivered

As Indians switched off lights in homes and lighted lamps and candles Sunday night following prime minister Narendra Modi’s appeal as a gesture of solidarity in the fight against COVID-19, the power grid held up well despite the sudden drop in demand. In a short video message on Friday

3 out of 4 Covid-19 patients in 21-60 yrs age group

Contrary to the perception that the elderly are more at risk from Covid-19, in India as many as 41.88% of corona positive cases are between 21 to 40 years of age. Also, 32.82% positive cases are between 41 to 60 years, followed by 16.69% cases above the age of 60 years and 8.61% coronavirus positive cases

Why everyone should wear mask

In view of the increasing number of COVID -19 cases in the country, the ministry of health and family welfare (MoHFW) has now advised that everyone must voluntarily wear a mask and especially those living in densely populated areas.   Not just as a matter of maintaining personal hygiene

Fighting Covid-19, India has realized its collective strength: PM

In the face of the Covid-19 pandemic, people of India have realized their collective strength, prime minister Narendra Modi said in a short video message Friday morning. He also urged people to light lamps Sunday night as a gesture of this collectivity. “Today marks nine days of the na



Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter