Struggling to cope with bad loans and the aftermath of the demonetisation decision, Indian banks have taken a hit on lending. Loan growth plunged by Rs 1 lakh crore in the fortnight that ended November 25, according to estimates. According to RBI data, credit or loan growth for the fortnight that ended November 25 declined to 6.6 per cent from 7.9 per on a year-on-year basis in the previous fortnight.
“Credit growth fell by around Rs 65,000 crore from November 11 to November 25. At the same time last year, credit growth rose by Rs 38,000 crore and the year before last, the growth was around Rs 30,000 crore during the same fortnight. The average credit growth in a fortnight is around Rs 30,000-35,000 crore. Compared to the previous years, this means overall credit growth has declined by Rs 100,000 crore during the first fortnight after the withdrawal of notes,” Udit Kariwala, Analyst, Financial Institutions, India Ratings & Research, said.
During the fortnight that ended September 5, 2014, credit growth in the banking system fell to 9.68 per cent — the first time since October 2009 (9.01 per cent) that growth in bank credit fell below 10 per cent.
Bankers said the note withdrawal exercise may turn out to be a drag on the banking sector’s profits with retail fee income falling and operating costs rising sharply.
“Attention was diverted from normal business as banks were directing all their resources for collecting deposits after demonetisation. We were forced to deploy most of the staff for cash management — collecting deposits as well as handling withdrawals and note supplies. We asked staff who were on leave to join back. On many days, our staffers were leaving branches well past midnight,” a senior official of a leading nationalised bank said.
“It’s very difficult to quantify the impact of cash management on the working of banks. Operating costs of banks have gone up after the announcement. There could be some impact on the banks’ financials in the third quarter,” Kariwala said.
The loan offtake has fallen as bank manpower was concentrating fully on the demonetisation issues. This trend is likely to continue for the next few fortnights since the currency issue is yet to be sorted and shortage is likely to continue even after the December 30 deadline, a banking source said.
Bankers said waivers and reduction in charges and fee on debit and credit cards and ATM use are likely to bring down the retail fee income of banks. Banks have decided to waive transaction charges on debit card payments to ease the cash crunch. Banks that issue point-of-sale charge merchants a merchant discount rate (MDR).
The waiver will be in place until December 30. National Payments Corporation of India has waived the fee for switching services until December 31. Visa and Mastercard have also agreed to cut the surcharge on debit card purchases till then.
Banks are now caught in a dilemma even as they stare at a decline in loan growth — considering the surge in deposits since November 9. As much as Rs 12.44 lakh crore was deposited by customers in Rs 500 and Rs 1,000 notes up to December 10. While this has not led to a decline in lending rate, banks have been slashing deposit rates across the board.
“Since the banknote ban, falling bond yields and ample liquidity saw banks swiftly trim deposit rates but are yet to meaningfully lower borrowing rates. The next round of MCLR (marginal cost of funds lending rate) review, probably in early 2017, might see banks lower these rates,” Radhika Rao, Economist, DBS Bank, said.
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