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.
Ayurveda: The True Way to Restore Your Health and Happiness By Dr. G. G. Gangadharan Ebury/Penguin, 224 pages, Rs 299 Dr G.G. Gangadharan, a champion of Ayurveda for three and a half decades, has penned an introductory book on India’s ancient
The ‘Mumbai Model’, which helped the city beat Covid-19, came in for praise from the supreme court too. The BMC can now extend that model of decentralisation for more efficiency in day-to-day citizen services and to make Mumbai a better-managed and future-ready city, says the Praja Foundation.
Though there is no weekly viewership data for individual news channels coming since mid-October 2020, after allegations of manipulation of television rating points (TRPs) by three news channels, percentage of viewers watching news across the world doubled during lockdown. According to Avinash Pandey, CEO,
A team of the Delhi government’s health department has visited Mumbai to learn from the city’s officials how to battle Covid-19 more efficiently, following the supreme court’s advice last month that the capital should learn from the ‘Mumbai model’ that has successfully control
The World Happiness Report, one of the best tools for evaluating global happiness, is based on how ecstatic people perceive themselves to be. It considers six characteristics to rank countries on overall happiness: GDP per capita, social support, life expectancy, freedom to make choices, generosity, and pe
* If I have contracted Covid, after how many days can I get myself vaccinated? * Can people with allergies get vaccinated? * Can pregnant women take the vaccine? What about lactating mothers? * Do I get enough antibodies after getting vaccinated?