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Indian Banking Report January-February 2010

Contributed by Nirmal Bang

By Nirmal Bang

Negative credit off-take witnessed in the latest fortnight

Bank credit for the fortnight ended 15th January 2010, grew by 13.8% on a YOY basis as against 22% in the corresponding period of the previous year. After swelling to a nine©\month high in the previous fortnight, the outstanding credit of schedule commercial banks decreased by Rs 11,898 crore in fortnight under review. On a YTD basis, credit growth continued to remain sluggish at 8.4% in the current fortnight as compared to 12% in the corresponding period of the previous year. Consequently, as on the last fortnight ended on 2 January 2010, bank credit increased by 79,514 crores, however, in the current fortnight banks witnessed a reversal resulting into a decline in outstanding credit.

One of the reason for low credit off take could be attributed to the availability of alternative non banking sources of finance including bonds, NCD at low rates which has reduced the dependence of large corporate on bank credit. RBI in its latest monetary policy has reiterated its credit growth target from earlier 18% to 16% in the view of increased availability of funds from non©\banking sources.

Deposits for the fortnight ended 15 January 2010, increased 16.9% on a YOY basis as compared to 20.1% in the corresponding period previous year. On a fortnightly basis, bank deposits saw a reduction of Rs.21,966 crores compared to previous fortnight. On a YTD basis, banks have mobilized Rs. 4,08,464 crores during April to December 2009. Credit deposit ratio stood at 70.9% at the end of the current fortnight as compared to 72.9%, a year ago. Credit deposit ratio is witnessing an increase after a decline in the period from March to November 2009, on account of increase in credit off©\take and decline in the deposit growth in the last fortnight. Demand deposits have witnessed an increase in the previous quarter to the extent of Rs. 40,917 crores which has resulted in a spike in CASA reported by most of the banks in their third quarter results. However, in the current fortnight, demand deposit has shrunk by Rs 25,334 crore. RBI has now projected banks deposits to grow at 17% for the current financial year as compared to 18% projection in the second quarter monetary policy review.

Investments for the fortnight ended 15 January 2010, increased by 21.0% on a YOY basis as compared to 17.2% in the corresponding period previous year. On account of low credit growth, banks are parking more funds in government securities and other approved debt securities thereby leading to a rise in Investment to Deposit Ratio (IDR). As a result of the drop in deposit mobilization, banks?? investment in government securities, or the instruments that qualify for statutory liquidity ratio, declined by Rs 32,641 crore to Rs 13,80,157 crore in the current fortnight. IDR stood at 32.5% levels in the current fortnight.

Investments in mutual funds have increased from Rs. 42,428 crores in the previous fortnight to Rs. 1,03,087 crores indicating rise in bank??s investment in mutual funds. 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.

Money Supply and Inflation

Growth in M3 increased by 16.5% on a YOY basis in the week ended 15 January 2010 as compared to 20% at the beginning of the financial year, reflecting deceleration in the bank credit growth during the current year. Important source of M3 expansion this year has been bank credit to government, reflecting the enlarged support to the market borrowing of the government and unwinding of MSS securities. Among the sources of money supply, net bank credit to commercial sector increased by 7.9% on a YTD basis as compared to 11% in the corresponding period previous year. Other components, except net bank credit showed a decrease on a YTD basis; however a 20% increase in the net bank credit to government compensated for the shortfall in other components. However, on a fortnightly basis money supply decreased by 0.1% or Rs. 5,762 crores.

WPI inflation rose by 7.31% for the month of December 2009 as compared to corresponding period in the previous year. Increase in food prices reflected in a 14.88% rise in primary goods coupled with low base effect continues to exert an upward pressure on inflation. The deficient monsoon and drought condition in several parts of the country have accentuated the pressure on food prices, pushing up the overall inflation rate of both WPI and consumer price indices. Additional factors like rising crude prices and demand side pressures have added to upward pressure on WPI inflation. Keeping in view the global trend in commodity prices and domestic demand©\supply, the baseline projection for WPI inflation at the end ?CMarch 2010 is placed by RBI at 8.5% as compared to 6.5% projected in the second quarter review.

With Inflation threat looming large, RBI has increased CRR (cash reserve ratio) by 75 basis points to 5.75% in order to curb further inflationary pressures.

Going forward, we believe that inflation for the year end will be in the range of 8.5©\9% as indicated by RBI. However, in FY 2010©\11, inflation is likely to decline as the central bank will initiate the process of withdrawal of stimulus through tightening of the policy rates.

The Indices of Industrial Production (IIP) for the Mining, Manufacturing and Electricity sectors for the month of November 2009 stand at 192.9, 322.6, and 223.5 respectively, with the corresponding growth rates of 10.0%, 12.7% and 3.3% as compared to November 2008. The cumulative growth during April©\ November 2009©\10 over the corresponding period in the three sectors have been 8.3%, 7.7% and 6.1% respectively, which moved the overall growth in the General Index to 7.6%.

As peruse©\based classification, the sectoral growth rates in November 2009 on a YOY basis are 6.0% in Basic goods, 12.0% in Capital goods and 19.0% in Intermediate goods. The Consumer durables and Consumer non©\durables have recorded growth of 37.0% and 3.0% respectively, with the overall growth in Consumer goods being 11.1%. Overall, the economy has witnessed impressive industrial growth primarily on the back of manufacturing sector. In manufacturing sector, strong performance has been witnessed especially in capital goods and consumer durables industries.

With a slow credit growth and ample deposit growth, liquidity in the banking system remains healthy. As a result of abundant liquidity, interbank call rates stayed closed to the lower bound of the LAF corridor in the current fortnight. Going forward, RBI has increased CRR by 75 bps with a view to combat the rising inflation; however, we believe that short term rates will remain at lower level on account of ample liquidity in the system.