Moody’s warns of short-term disruption

press trust of india

New Delhi, Nov 24: Moody’s Investors Service Thursday said demonetisation will, in the near term, significantly disrupt economic activity and lead to weaker growth. In the long run, it said, the move could boost tax revenues and translate into faster fiscal consolidation.
“(Demonetisation will) weigh on GDP growth for a few quarters, dampening government revenues,” it said.
In its report titled ‘Indian Credit — Demonetisation Is Beneficial for Indian Government and Banks; Implementation Challenges Will Disrupt Economic Activity’, Moody’s said demonetisation was affecting all sectors of the economy differently and that banks were key beneficiaries of the move.
“Corporates will see economic activity decline, with lower sales volumes and cash flows, with those directly exposed to retail sales most affected,” Moody’s Corporate Finance Group MD Laura Acres said.
However, greater formalisation of economic and financial activity would ultimately help broaden the tax base and expand usage of the financial system, which would be credit positive, it added.
In a separate report, S&P Global Ratings, too, said demonetisation would be positive in long-term, but will have a transitory impact on growth in the short run and could hurt banks’ asset quality.
“Bank deposits would benefit due to demonetisation, though not all inflows will remain in the banking system on a permanent basis,” S&P said in its report.
Moody’s said implementation challenges, besides affecting growth and government revenues, will impact corporates by lowering sales volumes and cash flows. In the medium term, the impact on corporates will depend on how quickly liquidity returns to the system and transaction flows are restored, it added.
The US-based agency said the government could prevent the same amount of cash from returning into the system in an effort to increase the use of non-cash transactions and digital payments.
“This would improve the overall operating environment for doing business in India — by improving the ease and speed at which payments reach manufacturers and reducing corruption — but would prolong the economic disruption,” it added.
In the near term, Moody’s expects asset quality to deteriorate for banks and non-bank finance companies, as economic disruption will significantly impact the ability of borrowers to repay loans, in particular for the loans against property, commercial vehicles and microfinance sectors.
“A prolonged disruption could also have a more significant impact on asset quality, as both corporate and small-and medium-sized enterprise customers have a limited ability to withstand a sustained period of economic weakness,” Moody’s said.
S&P in its report titled ‘Banking Industry Country Risk Assessment: India’ said: “The economic risks facing financial institutions in India have increased amid structural and cyclical challenges that Indian companies face.”
S&P said India’s low-income economy constrains its economic resilience. “We expect GDP per capita to remain low at $1,703 by the end of March 2017,” it said.
“The banking system’s good franchise, extensive branch networks, and large domestic savings support the deposit base. We expect efficient banks with higher profitability, capitalisation and a focus on digital banking to gain market share over others,” it said.
“We expect risk from economic imbalances to be low in the next 12 months,” it added.

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