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Demonetisation impact: Demand for loans at 54-year low

business Updated: Dec 27, 2016 11:05 IST
Beena Parmar
note ban

Banks are likely to witness a weak third quarter due to subdued demand for home, vehicle and consumer loans, bringing loan growth to a 54-year low. (AP)

Banks are likely to witness a weak third quarter due to subdued demand for home, vehicle and consumer loans, bringing loan growth to a 54-year low.

The Reserve Bank of India data last week showed a major dip in loan growth at 5.8% for the fortnight ended December 9. This is the lowest growth rate since 1962. Two months ago, the loan growth was around 8%.

Loan growth is a major factor in determining the economic activity of a country.

With 86% of the cash currency invalidated from November 8 and withdrawal limits imposed on the public, the cash crunch and uncertainty in the market is forcing individuals and smaller borrowers to postpone their spending and borrowing plans.

A senior Bank of Baroda official said, “Retail individuals are largely impacted by the demonetisation move and they are waiting for the prices to come down. We have seen very less or almost flat growth in home and auto loans as compared to the previous quarter. Repayments also have been very low across the sector. Though the banks may benefit on the back of higher deposits and treasury gains, we may see a temporary slowdown in the third quarter.”

Further, since most bank staff is focused on managing the long customer queues and currency management at branches, they have little time to focus on other bank activities, including processing of loans.

Parthasarathi Mukherjee, managing director and the CEO of Chennai-based Lakshmi Vilas Bank, said, “This quarter will definitely not be good as retail and small and medium sector enterprises have suffered. We may see this (slowdown) being passed on to the January to March quarter.”

Bankers say the pick-up in credit or loan demand will depend on the withdrawal limits and the liquidity scenario. It is unlikely that the situation will improve in the fourth quarter (January-March).

Karthik Srinivasan, senior vice-president of ICRA rating agency, said, “Till October, agriculture and retail was driving growth for banks, while corporate loan growth remained weak. Demonetisation has impacted retail demand and corporates are also looking outside (banks) to borrow money as bank rates are still 1.5-2% higher. With the third quarter growth being hit, this may impact the yearly growth for FY16-17. … Growth in interest margins and bad loans are likely to be impacted as there is a sudden surge in deposits, but there is no demand for loans and the recovery of bad loans is still not good.”

Srinivasan added that ICRA’s earlier estimates suggested an annual growth of 11% for banks, but now this may be reduced to below 10%.