Pain before gain for Indian banks after Modi's cash gamble

Sun Dec 18, 2016 6:15pm EST
 
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By Devidutta Tripathy and Manoj Kumar

MUMBAI/NEW DELHI (Reuters) - India's shock move to abolish high-value banknotes was expected to deliver a windfall to lenders, and banks have indeed seen coffers swell after people deposited 12.4 trillion rupees($183 billion) in cash into the system.

But while banks may benefit in the longer term, so-called "demonetization" has hit them hard in the immediate aftermath, with demand for credit plummeting and additional costs incurred to make the transition.

Prime Minister Narendra Modi's decision to remove 500 and 1,000 rupee notes to funnel illicit cash into the formal financial sector has led to a severe cash shortage as the central bank has replaced barely a third of the higher-value notes that had been in circulation.

That has hit business confidence and dented demand for loans, hurting banks that were already battling the weakest loan growth in nearly two decades.

Not that they have resources to process loans anyway. Removing 86 percent of currency in circulation from Asia's third-largest economy has proved harder than expected, and staff have focused mainly on customers changing old money for new.

"Our top priority is to provide relief to our customers, while lending could wait for some time," said Vaibhav Anand, who manages a branch of state-run Bank of India (BOI.NS: Quote) in Parliament Street, near Modi's office in New Delhi.

For a sector that has long struggled with low profitability and sour loans currently totaling $136 billion, even a temporary hit is painful.

And the impact could be longer than expected, if businesses recover slowly.   Continued...

 
A man displays 500 Indian rupee notes during a rally organised by India’s main opposition Congress party against the government's decision to withdraw 500 and 1000 Indian rupee banknotes from circulation, in Ajmer, India, November 24, 2016. REUTERS/Himanshu Sharma/File Photo