CII-IBA Financial Conditions Index - April-June 2016

Financial Conditions IndexApril – June 2016

CII - IBA Financial Conditions Index (April-June 2016)

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CII – IBA Financial Conditions Index improves to 61.1 in Q1 FY 2016-17 from 47.8 in Q4 FY 2015-16

The CII – IBA Financial Conditions Index at 61.1 for Q1 FY 2016-17 shows healthy improvement in the overall financial conditions in the Indian economy vis-à-vis the previous quarter (47.8) owing to strong expectations of leading banks and financial institutions of reduction in cost of funds, comfortable liquidity position and better external financial linkages whereas the overall economic activity also signaling improvement, albeit moderately on a quarter on quarter basis.

According to the CII – IBA Financial Conditions Index for Q1 FY 2016-17, there was a strong rebound in the expectation of banks and financial institutions for an improvement in the overall financial conditions index as reflected from a significant improvement in the cost of funds index (70.7), funding liquidity index (67.2) and the external financial linkages index (54.6). While the economic activity index (51.8) also recorded overall improvement, there was a relative decline in the performance from the previous quarter.

The reading of the CII – IBA Financial Conditions Index for Q1 FY 2016-17 at 61.1 was significantly above the 50 mark implying a strong majority of the respondent banks and financial institutions reporting improvement or no change in the overall financial conditions as against deterioration vis-à-vis the previous quarter. A total of 41 major banks and financial institutions with combined total assets (as of March 2016) of more than Rs 72 lakh crore participated in the survey.

Releasing the Index for the first quarter of 2016-17, Mr Chandrajit Banerjee, Director General, CII said “The directional change in the performance of the Financial Conditions Index augurs well for the Indian financial sector as well as for the real sectors of the economy. We are certain that traversing the external headwinds, the Government and the RBI would continue to focus on the twin objectives of maintaining financial stability and enhancing economic growth”.

Commenting on the performance of the Index, Mr Ashwani Kumar, Chairman, IBA and Chairman & Managing Director, Dena Bank said “Sustainable improvement in the financial conditions is a key imperative for strengthening the health of the Indian financial sector. With the gradual improvement in the overall macro-economic situation, financial conditions index is quite likely to witness upturn in coming quarters”.

Performance of CII – IBA Financial Conditions Index for Q1 FY 2016-17 vs Q4 FY 2015-16 and Q1 FY 2015-16

CII - IBA Financial Conditions Index Sub-indices Q1 FY 2016-17 Q4 FY 2015-16 Q1 FY2015-16

Cost of Funds Index 70.7 44.8 83.0Funding Liquidity Index 67.2 45.7 78.8External Financial Linkages Index 54.6 36.0 65.4Economic Activity Index 51.8 64.6 69.1

Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016


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Performance of CII – IBA Financial Conditions Index at Sub-Indices Level


For Q1 FY 2016-17, the Cost of Funds Index was at the highest level among the sub-indices, contributing the maximum share (29.1%) in the strong performance of the overall Financial Conditions Index, followed by the Funding Liquidity Index contributing 27.6%, External Financial Linkages Index contributing 22.3% and Economic Activity Index contributing 21.1%.

Sub-indices Contribution (in %) to Financial Conditions Index


Among the sub-indices, the Cost of Funds Index witnessed the maximum improvement to reach at 71.2 in Q1 FY 2016-17 from 44.8 in the previous quarter. This reflects that the majority of the respondent banks and financial institutions expect the overall cost of funds to decline in the current quarter.

Among the cost of funds indicators, strong majority of the respondents expected the banks’ Marginal Cost Lending Rate (MCLR) and the short-term interest rates (the interbank call rate & 3 month bank certificate of deposit rate) to decline. Further, maximum number of respondents expected the long-term interest rate (yield on 10 year government bond) and the Corporate Bond Spread (between top rated 10 year corporate bond & government bond) to improve in the first quarter easing the overall cost of funds.


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Performance of Cost of Funds Index


The Funding Liquidity Index was recorded at 67.5, second highest value among the sub-indices, recording significant improvement from the previous quarter (45.7). The number is significantly higher than the 50 mark, signaling a strong expectation of improvement in the funding liquidity in the Indian financial system.

Majority of the respondents expect improvement in liquidity through RBI’s management of the Liquidity Adjustment Facility (LAF) operations as well as the term repos and reverse repos window. Maximum number of the respondent banks and financial institutions expect improvement in mobilization in the money market through commercial papers & certificate of deposits and issuance in the corporate bond market. Further, mobilization from equity market was also expected to improve in the first quarter of 2016-17 by majority of the respondents.

Performance of Funding Liquidity Index


The External Financial Linkages Index is at 54.5 as against 36.0 in the previous quarter. The Indian financial sector remained unperturbed from the effects of the US Fed interest rate as majority of the banks and financial institutions expect net capital inflows by FIIs to increase in the current quarter. However, majority of the banks and financial institutions also expected the Rupee


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to depreciate against the US dollar whereas India’s position on the foreign exchange reserves was expected to improve. Further, majority of the respondents expect that the mobilization by Indian companies through global equity & debt markets is not likely to change significantly during the current quarter.

Performance of External Financial Linkages Index


The Economic Activity Index with a standing at 51.6 witnessed deterioration from 64.6 in the previous quarter. The deterioration on a quarter on quarter basis was led by the performance on the inflation (Consumer Price Index) front which was expected by majority of the respondent banks and financial institutions to deteriorate. Further, the maximum number of respondents expects the Non-Food Bank Credit in the current quarter to deteriorate. However, majority of the respondents expected improvement in growth rate of real GDP whereas maximum number of respondents expects no significant change in the asset prices (stock and housing market) vis-à-vis the previous quarter.

Performance of Economic Activity Index



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The CII – IBA Financial Conditions Index is based on a survey of major banks and financial institutions on their expectations of key financial and economic variables determining financial conditions in the Indian economy. A total of 41 leading banks and financial institutions (details in Annexure) participated in the survey for the current quarter.

In terms of different category of respondents, 20 Public Sector Banks, 7 Private Sector Banks, 7 Foreign Banks, 2 Cooperative Banks and 5 NBFCs participated in Round 5 of the Financial Conditions Expectation Survey. Based on their responses, the CII – IBA Financial Conditions Index was derived for the April - June 2016 quarter.

Category-wise Responses


Category-wise Financial Conditions Index


The CII - IBA Financial Conditions Index was launched in the first quarter of 2015-16 to (i) Serve as a key indicator in assessing the short term financial conditions in the Indian economy, (ii) Provide effective monitoring of current financial conditions for facilitating regulatory and policy decisions, (iii) Provide early signals on turning points in financial conditions, and (iv) Help tracking credit flow conditions for industry & service sectors from various channels. With this we have completed five rounds of the survey.


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Annexure

List of Participating Banks & Financial Institutions

CII – IBA Financial Conditions Expectation Survey, Round 5, April - June 2016

S.No. PUBLIC SECTOR BANKS1 State Bank of Bikaner & Jaipur2 State Bank of Mysore3 State Bank of Patiala4 State Bank of Travancore5 Allahabad Bank6 Bank of Baroda7 Bank of India8 Bank of Maharashtra9 Bhartiya Mahila Bank

10 Canara Bank11 Central Bank of India12 Corporation Bank13 Indian Bank14 Indian Overseas Bank15 Punjab and Sind Bank16 Syndicate Bank17 UCO Bank18 Union Bank of India19 United Bank of India20 Vijaya Bank

S.No. PRIVATE BANKS1 Jammu & Kashmir Bank 2 Karnataka Bank3 Karur Vysya Bank4 Lakshmi Vilas Bank5 Tamilnad Mercantile Bank6 Axis Bank 7 HDFC Bank

S.No. FOREIGN BANKS1 ANZ Bank 2 Commonwealth Bank of Australia3 DBS Bank4 Mizuhu Corporate Bank5 Standard Charted Bank6 State Bank of Mauritius 7 Sumitomo Mitsui Banking

Corporation

S.No. CO-OPERATIVE BANKS1 Janata Sahakari Bank Ltd2 New India Co-operative Bank Ltd

S.No. NBFCs1 L&T Finance Holdings Limited2 Shriram Transport Finance

Company Limited3 Dewan Housing Finance

Corporation Ltd4 Manappuram Financial Limited5 HDFC Ltd

The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the

development of India, partnering industry, Government, and civil society, through advisory and consultative

processes.

CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive

role in India’s development process. Founded in 1895, India’s premier business association has over 8000

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Indian Banks' Association (IBA), was formed on 26 September 1946. IBA is a voluntary Association of Indian

Public Sector Banks, Private Sector Banks, Co-operative Sector Banks, Regional Rural Banks, Foreign Banks

operating in India and other Financial Institutions. At present IBA has 134 banks as Ordinary Members and 64

financial institutions as Associate Members. The Association promotes sound and progressive banking

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Build up the image of banking industry through publicity and public relations. Over a period of time IBA has

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CII-IBA Financial Conditions Index - April-June 2016