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Despite Swelling Deposits, Indian Banks Have a Bleak Outlook

Economists say that the near-term hit to economy due to demonetisation will impact the borrowers ability to service loans, thus impacting the asset quality of banks
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Despite the swelling deposits at banks, ratings agencies believe that the pain is likely to continue.
Despite the swelling deposits at banks, ratings agencies believe that the pain is likely to continue.
Before government's announcement of demonetisation of Rs 500 and Rs 1,000 currency notes, the Indian banking system was reeling under the non-performing assets and the government was looking for ways to recapitalise Indian banks.

Last year, Finance Minister Arun Jaitley had announced a four-year road map for infusing Rs 70,000 crore in state-run banks. But even that money is not seen enough as the NPAs or bad assets in the banking sector accounted for over Rs 4 lakh crore and if the stressed assets were included, the amount went well beyond Rs 10 lakh crore.

However, the situation changed overnight with government announcing a window of 50 days to deposit all old notes in the banks. Within two weeks of demonetisation, the banks have received an amount of over Rs 6 lakh crore in deposits in the form of old notes.Excess cash deposits have led banks to cut the interest rates on fixed deposits for retail as well as corporate customers.

Despite the swelling deposits at banks, ratings agencies believe that the pain is likely to continue for banks.

S&P on Thursday said economic risks faced by banks in India have increased amid "deteriorating credit profile of corporates" while demonetisation could hurt lenders' asset quality in the short-term.

"The economic risks facing financial institutions in India have increased amid structural and cyclical challenges that Indian companies face," S&P said in its report.

Economists say that the near-term hit to economy due to demonetisation will impact the borrowers' ability to service loans, thus impacting the asset quality of banks.

Former Chief Statistician of India Pronab Sen has said that the demonetisation has dealt a blow to the informal economy in the country which provides employment to 80 per cent of the country's workforce and accounts for 45 per cent of India's GDP.

According to Mr Sen, the negative impact on GDP due to demonetisation could be in the range of 1 per cent to 3 per cent.

Since the announcement of demonetisation on November 9, BSE benchmark SENSEX has slumped 6.5 per cent. For Bank Nifty the fall has been 6.58 per cent..

Reflecting the negative sentiment for the Indian corporates due to demonetisation, another international ratings Agency, Fitch Ratings, has reaffirmed negative outlook on India's banking sector due to poor asset quality and weak earnings of companies.

In the report titled "2017 Outlook: Indian Banks", Fitch Ratings said, the negative outlook on the banking sector suggests there may be more downside risks, if the risks of deteriorating asset quality and weak earnings are not counterbalanced by larger capital injections.

(With Inputs From Agencies)
 

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