CII-IBA Financial Conditions Index - April-June 2016

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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) reflecting from 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.
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  • 1. Financial Conditions Index April – June 2016
  • 2. CII - IBA Financial Conditions Index (April-June 2016) 1 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 83.0 Funding Liquidity Index 67.2 45.7 78.8 External Financial Linkages Index 54.6 36.0 65.4 Economic Activity Index 51.8 64.6 69.1 Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016
  • 3. CII - IBA Financial Conditions Index (April-June 2016) 2 Performance of CII – IBA Financial Conditions Index at Sub-Indices Level Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016 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 Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016 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.
  • 4. CII - IBA Financial Conditions Index (April-June 2016) 3 Performance of Cost of Funds Index Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016 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 Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016 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
  • 5. CII - IBA Financial Conditions Index (April-June 2016) 4 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 Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016 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 Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016
  • 6. CII - IBA Financial Conditions Index (April-June 2016) 5 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 Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016 Category-wise Financial Conditions Index Source: CII – IBA Financial Conditions Index – Round 5, April - June 2016 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.
  • 7. CII - IBA Financial Conditions Index (April-June 2016) 6 Annexure List of Participating Banks & Financial Institutions CII – IBA Financial Conditions Expectation Survey, Round 5, April - June 2016 S.No. PUBLIC SECTOR BANKS 1 State Bank of Bikaner & Jaipur 2 State Bank of Mysore 3 State Bank of Patiala 4 State Bank of Travancore 5 Allahabad Bank 6 Bank of Baroda 7 Bank of India 8 Bank of Maharashtra 9 Bhartiya Mahila Bank 10 Canara Bank 11 Central Bank of India 12 Corporation Bank 13 Indian Bank 14 Indian Overseas Bank 15 Punjab and Sind Bank 16 Syndicate Bank 17 UCO Bank 18 Union Bank of India 19 United Bank of India 20 Vijaya Bank S.No. PRIVATE BANKS 1 Jammu & Kashmir Bank 2 Karnataka Bank 3 Karur Vysya Bank 4 Lakshmi Vilas Bank 5 Tamilnad Mercantile Bank 6 Axis Bank 7 HDFC Bank S.No. FOREIGN BANKS 1 ANZ Bank 2 Commonwealth Bank of Australia 3 DBS Bank 4 Mizuhu Corporate Bank 5 Standard Charted Bank 6 State Bank of Mauritius 7 Sumitomo Mitsui Banking Corporation S.No. CO-OPERATIVE BANKS 1 Janata Sahakari Bank Ltd 2 New India Co-operative Bank Ltd S.No. NBFCs 1 L&T Finance Holdings Limited 2 Shriram Transport Finance Company Limited 3 Dewan Housing Finance Corporation Ltd 4 Manappuram Financial Limited 5 HDFC Ltd
  • 8. 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 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 200,000 enterprises from around 240 national and regional sectoral industry bodies. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues. Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few. The CII theme for 2016-17, Building National Competitiveness, emphasizes Industry’s role in partnering Government to accelerate competitiveness across sectors, with sustained global competitiveness as the goal. The focus is on six key enablers: Human Development; Corporate Integrity and Good Citizenship; Ease of Doing Business; Innovation andTechnical Capability; Sustainability; and Integration with the World. With 66 offices, including 9 Centres of Excellence, in India, and 9 overseas offices in Australia, Bahrain, China, Egypt, France, Germany, Singapore, UK, and USA, as well as institutional partnerships with 320 counterpart organizations in 106 countries, CII serves as a reference point for Indian industry and the international business community. 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 principles and practices. It works proactively for the growth of a healthy professional and forward looking banking and financial services industry in a manner consistent with public good. IBA endeavours to a) promote sound and progressive banking principles and practices b) assist and provide common services to members c) co-ordinate and co-operate on procedural, legal, technical, administration, and professional matters d) collate, classify and circulate statistical and other information e) Pool expertise towards common objectives and reduction in costs, increase efficiency, productivity and improve systems, procedures and banking practices f) Build up the image of banking industry through publicity and public relations. Over a period of time IBA has evolved as the “Voice of the Indian Banking Industry”. Confederation of Indian Industry
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