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Indian Banking fortnightly report (February 2010)

Contributed by Nirmal Bang

By Nirmal Bang

Impressive credit off-take witnessed in the latest fortnight

Bank credit for the fortnight ended 26th February 2010, grew by 15.8% on a YOY basis as against 18.3% in the corresponding period of the previous year. On a year?]on?]year basis, this is the highest growth recorded since August 14, 2009. This is the third fortnight in a row that bank credit has increased. In October, the growth rate had shrunk to a low of 9.75 %. On a YTD basis, banks have disbursed Rs.3,19,300 crores registering a growth of 11.5%. Given the current momentum in credit growth, the RBI?fs revised projection of 16 % non?]food credit growth for 2009?]10 looks achievable. There is possibility that banks may achieve the target, considering the last month surge which is usually witnessed towards the end of the fiscal. In March 2009 alone, bank credit was more than Rs. 100,000 crores.

Banks will have to disburse an additional Rs 1,23,900 crore in the month of March in order to reach the target of 16 %for the year. We believe that there would be strong pick up in credit demand going forward due to increased in capex expenditure from corporate and increase in investment activities across sectors. With the pickup in economy (IIP 16.7%) and resumption of spending, projects that were delayed would be revived, resulting in the increase in bank credit growth.

Deposits for the fortnight ended 26th February 2010, increased 16.8% on a YOY basis as compared to 19.78% in corresponding period previous year. On a fortnightly basis, bank deposits saw an addition of Rs.63,486 crores. On a YTD basis, banks have mobilized Rs. 43,63,300 crores during April to February 2010. Credit deposit ratio stood at 70.8% at the end of the current fortnight as compared to 71.4% a year ago. Demand deposits witnessed an increase of Rs. 23,767 during the current fortnight, whereas time deposits increased by Rs.39,719 crores. Incremental credit deposit ratio of the bank has been improving continuously and stood at 67% for the fortnight under review, substantially higher than low of 37% witnessed in October 2009. Pick?]up in credit since November and banks?f decision to shed bulk deposits has helped in improving credit deposit ratio.

Investments for the fortnight ended 26 February 2010, increased by 16.1% on a YOY basis as compared to 20.4% in the corresponding period previous year. Also IDR continues to remain high at 31.6% levels in the current fortnight. However, going forward, we believe that with credit growth expected to improve ahead, trend is set to reverse resulting in IDR to witness gradual downturn. As a result of credit off take, bank investment in government securities and other approved securities dropped by Rs 16,546 crore during the fortnight ended February 26, 2010. Despite the CRR hike, liquidity condition remains comfortable due to completion of the government's market borrowing programmes for 2009?]10.

Money Supply and Inflation

Growth in M3 increased by 16.4% on a YOY basis in the week ended February 2010. Among the sources of money supply, bank credit to government increased by 32.7% on a YOY basis as compared to 40% in the corresponding period previous year. Other sources of money supply, 'Net Foreign Exchange Assets' and 'Government's currency liability to the public' grew at a slower rate of 0.3% and 7.5 %, respectively, causing deceleration in total money supply growth. On a fortnightly basis money supply increase marginally by 1.1% or Rs. 58,145 crores.

WPI inflation rose to 9.89% for the month of February 2009, from 8.56% in the month of January. Inflation in primary articles was up 15.5 % on YOY basis, but remained unchanged on a monthly basis. There was a marginal deceleration in prices of cereals as well as pulses. However, this was offset by increase in the prices of dairy products, fruits and vegetables. Food price inflation also decelerated at 17.8% in February from 21.9% in December. We expect food price inflation to ease off going forward due to better than expected rabi crop output as indicated by second advance estimate of agriculture ministry. Inflation in fuel rose to 10.19% due to low base effect and increase prices of certain fuel items. Increase in the domestic fuel prices resulted in uptrend in fuel index. Inflation in manufacturing group rose to 7.42% in January led by higher price of food products, textiles, chemical products, rubber and tobacco products. The continuing rise in prices of food items coupled with firm commodity prices, inflation is expected to stay at high level till the first half of FY11.

The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of January 2010 stand at 215.6, 359.5, and 240.6 respectively, with the corresponding growth rates of 14.6%, 17.9% and 5.6% as compared to January 2009. The cumulative growth during April?]December, 2009?]10 over the corresponding period of 2008?]09 in the three sectors have been 9.3%, 9.9% and 5.7% respectively, which moved the overall growth in the General Index to 9.6%.

As per User?]based classification, the Sectoral growth rates in January 2010 over January 2009 are 10.7% in Basic goods, 56.2% in Capital goods and 21.3% in Intermediate goods. The Consumer durables and Consumer non?]durables have recorded growth of 31.6% and (?]) 3.1% respectively, with the overall growth in Consumer goods being 4.2%. The surge in capital goods production indicates buoyancy in investment activities and the rising confidence of investors in the economy. Overall, the economy has witnessed impressive industrial growth primarily on the back of manufacturing sector. Manufacturing sector grew at 18% partly due to low base effect. Industrial growth reflected the results yielded by stimulus packages given by the government to perk up industry that was hit by the global economic downturn. The stimulus measures comprising duty cuts and increase in public expenditure, particularly spurred manufacturing. industrial recovery appears to be well on track, which augurs well for overall economic growth.

On account of excess liquidity, call money rates have remained on the lower bound of the LAF corridor. In addition, deposit rates have also touched bottom in the range of 6.00% to 7.50%. Despite CRR hike of 75 basis point, call rate are unlikely to breach the LAF corridor, but may move towards upper corridor if the credit off takes picks up. Going forward, we believe that reversal of interest rate cycle remains a key inflection point and the Government may look at a gradual withdrawal of stimulus, in its attempt to manage the growth in the economy along with inflationary conditions. Many banks have also increased deposit rates as a result of increase in cash reserve ratio by RBI by 75 basis points. We don?ft expect lending rates to rise in the near term due to sufficient liquidity with banks. The 10?] year g?]sec yield was on the rise in February and closed the month at 7.86%. The rise in bond yields will result in banks reporting MTM losses in Q4FY10, especially PSU banks, as large part of their investment portfolio is in AFS and HFT category. Although net government borrowings scheduled for 2010?]11 were lower than expected, an increase in inflationary expectations on account of rising food inflation as well as a hike in retail petrol and diesel prices kept the yields on the benchmark paper high. In case the budgeted revenues from the 3G auctions and disinvestment do not materialize, government market borrowings could increase further and put pressure on the benchmark yields.