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.
After the recent announcement of the government guarantee for Security Receipts (SRs) to be issued by a public sector-owned National Asset Reconstruction Company Ltd (NARCL), there is a surge of interest around this desi version of a super bad bank. The entity will acquire around ₹2 trillion bad debts fr
The notion of a V-shape economic recovery is an exaggeration, and the informal economy and the poor have been terribly hurt during the Covid-19 period, says Gurcharan Das, author, commentator and public intellectual. “A V-shape recovery is an exaggeration. The informal economy and the
As many as 86.64% citizens of the city of Greater Mumbai have antibodies, according to the fifth sero-prevalence survey. Among the people who are fully or partially vaccinated, the antibodies were found in 90.26%, while among the unvaccinated citizens, 79.86% had antibodies. The Municipal C
The cabinet has cleared the formation of ‘National Asset Reconstruction Company Limited’ (NARCL) which will acquire “stressed assets” of about Rs. 2 Lakh crore in phases within RBI regulations in order to address the problem of humongous amounts of bad loans in public sector banks.
When consumer rights and RTI activist Mohammad Afzal was shifting to a new residence in a different area, he required changes in various documents. He decided to take the help of the Citizens Charter along with other friends who also required similar work with authorities. The Citizens Chart
Union Minister for Ports, Shipping & Waterways and AYUSH, Sarbananda Sonowal has underlined the importance of cross-border connectivity among India and developing nations of South-East Asia. Addressing the ASEAN summit on Future of India-ASEAN Connectivity Partnerships virt