Earnings of Indian banks for the quarter ended on December 31, 2016 witnessed slowdown in demand for credit among companies and retail borrowers, Moody's said. 

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On November 8, 2016, Prime Minister Narendra Modi announced ban on Rs 500 and Rs 1000 notes which led to severe crash crunch in the country. 

Moody's Investors Service in a report said that looking  ahead, while commentary from the banks point to rise in activity in January, but it is still below the levels seen in October. 

Moody's expects quarter ending March 31, 2017 to show more adverse trends. However, the impact on asset quality from demonetisation should be manageable for the banking sector, it said. 

The report said that the asset quality for private sector banks, particularly of Axis Bank and ICICI Bank is likely to deteriorate further. 

The report mentioned that both the banks have seen significant additions to their non-performing loans (NPLs) from outside of their already announced watchlist accounts. However, the rating agency had expected the deterioration to come predominantly from their watchlist accounts.

"A continuation of the increasing non-watchlist NPL trend would put negative pressure on the banks' credit profiles," Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer said. 

For the public sector banks, the report said that the asset quality have been more benign and the pace of deterioration has slowed in the past two quarters from the levels seen in FY2016.

"Overall, demonetisation has significantly impacted credit demand and deposit growth, but the effect on asset quality has been mixed, while retail payment systems -- such as card transactions and mobile wallets -- have benefitted," Vadlamani said.