Fall in external remittances is likely to affect the consumption demand, according to the India Ratings and Research (Ind-Ra). The rating agency on Thursday also said that muted external remittances growth is more of a structural issue than transitory.
According to Ind-Ra, the muted growth would further weaken aggregate consumption demand, though the impact will be restricted to few states, given their skewed shares in foreign remittances.
“On the macro front, a considerable flow of remittances directly impacts aggregate demand and thus banking sector deposits,” the agency said in a report.
“Meanwhile, banks with a higher non-resident Indian (NRI) deposit ratio in the total portfolio will be better able to hedge their risk than others, as the overall banking sector deposits are stable along with muted credit offtake.”
Historically, India has remained as the largest receiver of remittances in the world; however, the share of remittances as a percentage of gross disposable income receded to 2.5 per cent in FY19 from 3.5 per cent in FY10.
“Foreign currency non-resident (FCNR) has witnessed a year-on-year fall in deposits, whereas overall NRI accounts have reported an increase,” the report said.
“However, in Ind-Ra’s rated portfolio, The Federal Bank Limited (‘IND AA’/Stable) and The South Indian Bank Limited (‘IND A’/Negative) have reported subdued growth in NRI deposits.”
The agency opined that the key risk for banks will only emerge if the fall in deposits will continue amid an increase in withdrawals due to the factors induced by pandemic.
“At the same time, banks will be able to manage this risk better with the help of improved domestic deposits amid muted credit growth,” the agency said.
It added that in spite of the muted external remittances, the impact would largely be restricted to the aggregate consumption level in the first order.
“The agency believes the buoyancy in foreign capital flows would compensate the requirement of capital,” it added.