Asset quality of banks to worsen in Q4FY17 than Q3: Moodys

Srikanth Vadlamani of Moody's Investors Service says broader credit growth will be lower in Q4 than before demonetisation levels.Moody's has come out with a report on impact of demonetisation on banks.Speaking to CNBC-TV18, Vadlamani offered some solace by saying that the asset quality degradation due to demonetisation isn’t a permanent shock and attributed it as just a transit impact. However, he cautioned that the woes can spill over into Q1 of FY18 as well.Below is the verbatim transcript of Gagan Banga’s interview to Reema Tendulkar, and Prashant Nair on CNBC-TV18.Reema: In your report, you have said that the Q3 demand was hit by demonetisation. January has seen some pickup in the activity levels, but it is still tracking lower than the pre- demonetisation levels. Could you tell us how much lower are we compared to pre- demonetisation as we speak right now?A: It is extremely hard to quantify where we are vis-à-vis where we were before demonetisation. However, our sense is that even Q4, the broader credit growth would be lower than what it was before the demonetisation levels. So, we expect Q4 to be better than Q3, but it will still be getting the negative impact of demonetisation as far as growth is concerned.Reema: What about the asset quality, you think the impact on asset quality from demonetisation will be manageable, but if you could tell us what was the hit, what was the incremental addition to the asset quality on account of demonetisation and where the stress came in from and for which banks?A: In terms of the reported numbers, there was nothing that showed up in the reported numbers for two reasons. One is because this quarter only saw two months of demonetisation and also there was some dispensation that was given by Reserve Bank of India (RBI). However, where we are seeing early signs is in terms of when we look at the rated pools of securitised assets which are a good early indicator of what is happening to the specific asset classes. So, we are seeing the collections coming down significantly for example in tractors, even in passenger vehicles it has come down slightly. So, almost I think in all the main asset classes with a notable exception of housing, we have seen collections coming down.However, the big picture is that obviously there would have been an impact; that is not new news. The key is going to be whether this is an indicator of more lasting stress or this is just a transitory phase of one-two quarters before things come back to normal. Our sense is that we think we are treating this more of a transitory phase and the key point of comfort is that from a broader growth perspective as well, we expect it to be a one-two quarter bump rather than a more of a permanent shock and we think that should have a similar impact as far as the asset quality impact from demonetisation is concerned.Prashant: Many people have said that last quarter that is the December-ended quarter or even the March quarter, while it will give us a number, it will be not really reflective of some of the underlying issues on the ground and that may only come up later. Would you agree with that, both on growth and specifically on asset quality as well?A: I would agree with that on asset quality. On asset quality we definitely think that Q4, the reported numbers will be worse than Q3 for sure and maybe some of it will spill over into Q1 of next year as well. However, it doesn’t take away from the big picture that we don’t think asset quality would be dramatically different because demonetisation happened vis-à-vis if it hadn’t happened. So, it doesn’t take away from that message but in terms of the sequential reported numbers, yes, Q4 will show up more numbers because some of the dispensations will go away and probably Q1 is where the peak would come in.Now, as far as growth is concerned, the lasting impact from growth would come in if demonetisation would have a huge impact as far as the informal economy is concerned. So, if there is a debilitating impact on the informal economy, then it will have more lasting growth impact. However, at this point, I don’t know whether we have enough evidence to say that. So, we will watch out for that, but I don’t think that is there in our base case right now.