Demonetisation to impact banks' asset quality: Fitch

The demonetisation of high value currencies (Rs 500 and Rs 1,000) and the subsequent cash crunch is expected to push back the asset quality recovery of Indian banks, said Fitch Ratings.

Fitch also said stressed-asset ratio for Indian bank predicted to increase to 12% for the current fiscal earlier, is expected to go up further. Last fiscal the ratio was 11.4%.

In a statement issued on Tuesday, Fitch said: "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 Reserve Bank of India (RBI) 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.

According to the credit rating agency 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% for this fiscal and may even slow from 8.8% 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.