The recent repo rate cut is predicted to result in a reduction in deposit rates, followed by matching reductions in banks and their prime lending rates.

However, it is thought that these measures are unlikely to stoke strong demand for bank loans, or make banks more willing to lend.

Over the past three months, rate cuts have similarly failed to increase demand for credit. The financial sector has seen credit growth slow down to 22% in January 2009, from 29.4% in October 2008.

The financial meltdown is estimated to last during the first half of 2009-10. In this volatile environment, businesses are hesitant of expanding and are therefore not incurring additional capital expenditure, because their primary focus is on debt and liquidity.

European banks have shored up their stockpile of capital this week amid fears about a rising flood of bad loans from the spreading economic hurricane.

Banks around the region already have taken billions of euros in writedowns on their investments in complicated structured credit products, but the financial meltdown is increasingly spreading to the real economy, creating a double worry for earnings as firms cut borrowing and struggle to repay business loans.

“With HSBC there are worries about credit quality ... There is not a whole lot that is bright news out there anywhere today,” said Bernard McAlinden, strategist at NCB Stockbrokers.

And although the recent cut in interest rates for retail loans has so far failed to generate fresh demand, a further decline in lending rates may result in improved demand for car and housing loans.

A positive outlook

However, there are little glimmers of economical hope, with Deutsche's Josef Ackermann noting a positive business trend his bank had seen in January which continued last month: “By the end of January, we had revenues of 2.8 billion euros. February largely confirmed this development.”

On the asset quality front, non-performing assets (NPAs) are on the up in both corporate loan and retail books. The weakening of export-related sectors such as gems, jewellery, leather, textiles and automotive ancillaries, has lead to extra’s concerning NPAs during the year. Bank’s real estate exposure is another potential source of NPAs.

Alongside this, banks’ small and medium enterprise (SME) loans portfolio becomes a significant potential NPA generator; the banking environment’s exposure to the SME segment has grown quickly over the past three years, and the performance of such units are sensitive to economic conditions.

In addition, retail loans have not fared well either, with rising delinquencies in commercial vehicle loans and unsecured personal loans. As a direct result, banks have tightened their lending norms and are extremely selective in giving away new credit.

However, the banking sector is likely to remain stable in lending over the short term. Economists have predicted a credit growth to be around 15-16% in 2009-10.

It will take time for the economy to get its strength back after such a huge blow, but one thing is for sure, banks and lenders are certainly being kept busy.