‘Demonetisation hits banks’ earnings; NPL trends mixed’

By: | Published: February 24, 2017 4:09 AM

Retail payment systems such as a cards and mobile wallets have seen a significant increase in transactions, and should continue to see healthy growth.

The earnings of Indian banks for the December ended quarter of FY2017 revealed that the government’s decision to remove a high proportion of notes from circulation has led to a slowdown in economic activity that weighed on demand for credit among companies and retail borrowers during the quarter, according to a report published by Moody’s Investors Service on Feruary 23. Moody’s report assessed 15 rated banks in India.

“Overall, demonetisation has significantly impacted credit demand and deposit growth, but the effect on asset quality has been mixed, while retail payment systems — such as card transactions and mobile wallets —have benefitted,” said Srikanth Vadlamani, vice president, senior credit officer, Moody’s.

The report highlighted that while deposit growth has been strong this quarter, driven by the demonetisation inflows, it should moderate going forward as cash availability increases and restrictions on cash withdrawals expire, a moderation will occur in deposit growth over the next 12-18 months.

Retail payment systems such as a cards and mobile wallets have seen a significant increase in transactions, and should continue to see healthy growth. At the same time, given the low base, cash will remain the dominant source of retail transactions for the foreseeable future.

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“Looking ahead, while commentary from the banks points to a rise in activity in January, it is still below the levels seen in October, and we expect the quarter ending March 31, 2017 to show more adverse trends; but the impact on asset quality from demonetisation should be manageable for the banking sector,” adds Vadlamani.

In terms of asset quality the report said that the asset quality for private sector banks are likely to deteriorate further and the continuation of the increasing non-watchlist non-performing loans (NPLs) trend would put negative pressure on the banks’ credit profiles.

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