Note ban may delay banks asset quality recovery says, Fitch

On Tuesday ration agency Fitch said, demonetization is likely to push back recovery in banks’ asset quality as the cash shortage had a “disruptive impact” on India’s informal economy.

The impact of demonetization on asset quality will start showing significantly in data for the January-March quarter, the rating agency said.

“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 said in a statement.

The Reserve Bank of India has allowed forbearance on some loans to the agricultural sector and small businesses, but these account for a relatively small share of outstanding lending, Fitch said.

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“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 said.

Loan growth slowed to 4.8 percent in November 2016, from 6.7 per cent in October. We now think it is likely that loan growth will be below our previous forecast of 10 per cent in FY17 and may even slow from the 8.8 per cent recorded in FY16, Fitch said.

“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. The lasting impact on bank deposits — and lending rates — will become clear only after withdrawal limits are lifted,” Fitch added.

The government had demonetised 500 and 1,000 rupee notes on November 8, 2016. It had then asked holders of such notes to deposit in bank accounts. Since then an estimated Rs 15 lakh crore have been deposited in banks.


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