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3
February 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, Fitch Ratings says in a research note. 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
these have accounted for a relatively small share of outstanding lending. The Total Investment & Insurance
Solutions
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, point out
Fitch analysts. The Total Investment
& Insurance Solutions
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% year-on-year last quarter.
Loan growth slowed to 4.8% in November 2016, from 6.7% in October 2016. Fitch
analysts feel that it is likely that loan growth will be below its previous
forecast of 10% in FY17 and may even slow from the 8.8% recorded in FY16. The Total Investment & Insurance
Solutions
Finally,
Fitch analysts forecast that 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.The Total Investment
& Insurance Solutions
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