International ratings agency, Fitch Ratings in its latest report has said that cash crunch caused by the demonetisation of large denomination currency notes, is likely to push back recovery in banks' asset quality, as it had a disruptive impact on India's informal economy. According to the ratings agency, the note ban impact on asset quality to start showing up only in the January-March quarter data. It added that cash shortages have affected the income of many borrowers by holding back economic activity and reducing their short-term repayment abilities.
The ratings agency has said that the Reserve Bank of India 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 had previously expected the stressed-asset ratio for Indian banks to increase to 12 percent for the fiscal ending March 2017, from 11.4 percent in FY16. Now it said that there is a risk that the ratio will climb higher. But, it still consider 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.
On the loan growth of banks, Fitch said that demonetisation has also weighed on loan growth, at least in the short term as demand weakened in the uncertain economic environment and banks have had to focus on cash management instead of normal lending activities. It added that the growth has slowed to 4.8 percent in November 2016, from 6.7 percent in October. The ratings agency also said that it will be below their previous forecast of 10 percent in FY17 and may even slow from the 8.8 percent recorded in FY16. However, it said that 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.