New Delhi, Dec 30 (PTI) The struggle on bad loans that soared to menacing proportion in 2016 would continue in the new year as many more industrial units, especially in the MSME sector, may turn defaulters due to the cash shortage following demonetisation.

The withdrawal of high-value cash will also hit the bottom line of banks that have been busy exchanging old notes and issuing valid currency at the cost of credit growth and loan recovery.

The banking sector came almost to a standstill for nearly two months after the surprise announcement by Prime Minister Narendra Modi on November 8 scrapping ₹ 500 and 1,000 notes.

Out of the 27 public sector banks, 14 posted losses, aggregating ₹ 34,142 crore, last fiscal and the trend has not shown any improvement in the first half of 2016-17.

Worryingly, even private lenders have witnessed a jump in bad loans, pushing down their net profit.

Public banks have seen nearly ₹ 80,000 crore increase in gross non-performing assets (NPAs) in the three months ended September 2016. Their gross NPAs rose to ₹ 6,30,323 crore as against ₹ 5,50,346 crore by June-end.

Mindful of an NPA surge in the aftermath of the cash recall, RBI has provided additional 60 days for repayment of housing, car, farm and other loans worth up to ₹ 1 crore.

However, bankers feel that NPAs will move up at the end of the fourth quarter when the impact of the notes ban takes hold.

As far as wilful defaulters are concerned, PSBs have reported 16 per cent rise at 8,167 that collectively owe them ₹ 76,685 crore at the end of March 2016. Dues to the banks went up by 28.5 per cent to ₹ 76,685 crore in 2015-16, from the earlier ₹ 59,656 crore.

On the recapitalisation front, the government has already announced funds infusion of ₹ 22,915 crore, out of the ₹ 25,000 crore earmarked for 13 PSBs for the current fiscal. Of this, 75 per cent has already been released to them.

Banks have not been able to carry out their lending activity optimally since November 8 as their prime focus turned to exchanging notes and accepting old currency.

The result: Bank credit shrank by a whopping ₹ 61,000 crore, or 0.8 per cent, during the fortnight to November 25.

The outstanding credit stood at ₹ 72.92 lakh crore as of November 25, according to Reserve Bank of India data. The year-on-year credit growth was just 6.6 per cent, down from 9.3 per cent.

Bankers say there has been a sharp plunge in credit demand as the economy started to feel the adverse impact of the decision to cancel legal tender status of old currency notes.

Credit contraction risk threatens bank asset quality and may raise non-performing loans following the cash withdrawal policy. Demonetisation-induced cash withdrawal disrupted banking operations and materially strained asset quality by constricting liquidity for borrowers and diverting bank resources to currency exchange. This caused a pronounced escalation in non-performing assets across lenders, a rise in wilful defaulters, and a sharp fall in credit demand and credit growth. Government recapitalisation and regulatory relief, including repayment extensions for small loans, were deployed, but further NPA deterioration is anticipated as the cash shortage's full effects on loan repayment materialise.