Demonetisation to impact banks’ asset quality: Fitch

“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 RBI has allowed forbearance on some loans to the agricultural sector and small businesses, but these accounts for a relatively small share of outstanding lending,” Fitch said.

The credit rating agency says 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. “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,” Fitch said.

On the growth of loan portfolios of banks Fitch said the growth will be below its earlier estimate of 10 per cent for this fiscal and may even slow from 8.8 per cent in fiscal 2015-16.

The loan growth may increase if banks cut further their lending rates for which there is much scope as the cost of funds for the banks provided the additional deposits that had come following demonetisation remains with the banks. “The lasting impact on bank deposits – and lending rates – will become clear only after withdrawal limits are lifted,” Fitch said.