Demonetisation has significantly impacted credit demand and deposit growth of banks but had a mixed effect on asset quality in the third quarter of current fiscal, Moody’s Investors Service said today. The cancellation of legal tender of 500 and 1,000 rupee notes has led to a slowdown in economic activity that weighed on demand for credit among companies and retail borrowers during the October-December quarter, it said. “Demonetisation has significantly impacted credit demand and deposit growth but the effect on asset quality has been mixed; retail payment systems have benefited. While commentary from the banks points to a rise in activity in January 2017, it is still below pre-demonetisation levels,” Moody’s said. In its report, Moody’s said the slowdown in loan growth may also have been in part due to loan repayments using the demonetised currencies. This led to a slowdown in economic activity and weighed on demand for credit among companies and retail borrowers during the December quarter. “Banks have experienced significant inflows into their deposit base as customers deposit their existing holdings of the demonetised notes. However, we maintain our view that the level of bank deposits will increase by only around 1-2 per cent in the near-term, given the substantial role of cash in the Indian economy as a medium of transaction,” Moody’s said. Economic activity suffered in November and December 2016 as households and businesses experienced liquidity shortages following demonetisation.