Indian economy to improve in Q1, cost of funds may rise: CII-IBA

“The CII-IBA Financial Conditions Index at 56.9 for Q1 (April-June) FY 2017-18 reflects positive outlook in the overall financial condition in the Indian economy as compared to the previous quarter (48) owing to the expectation of improvement in the overall financial conditions in the economy on account of growth of External Financial Linkages, Funding Liquidity Index and Economic Activity Index,” a statement here said. 

The Confederation of Indian Industry (CII)-Indian Banks Association (IBA) joint survey of 31 banks and financial institutions, however, also anticipates the cost of funds to rise due to tightening of liquidity in the near future. “The Cost of Funds Index with a standing at 40.3 witnessed deterioration from 66 in the previous quarter. Majority of the respondents expected increase in the interest rate,” CII said. 

“The improvement of Financial Conditions Index projects overall optimism in the Indian financial sector on the back of increase in consumption, infrastructure spending amplified by slew of landmark reforms as evidenced by roll out of GST and formulation of the stressed loans resolution package through an ordinance by amending the Banking Regulation Act,” CII Director General Chandrajit Banerjee said.

The RBI has recently been empowered to issue directions to commercial banks to initiate insolvency proceedings for recovering bad loans.  The non-performing assets (NPAs), or bad loans, of state-run banks at the end of last September rose to Rs 6.3 lakh crore (almost $100 billion), as compared to Rs 5.5 lakh crore at the end of June 2016.

The 31 major banks and financial institutions surveyed have combined total assets of more than Rs 60 lakh crore. The industry body’s survey said the marginal cost of funds lending rates (MCLR) have seen minimal reduction across banks even though there is surplus liquidity in the market and rate cuts on deposits.

The external financial linkages index was recorded at 59.3, the second highest value among the sub-indices, registering significant improvement from the previous quarter (35.3), that shows the Indian financial sector remained “unperturbed” from the effects of the US Federal Reserve’s latest interest rate hike, CII said.

The funding liquidity index was recorded at 72.2, third highest value among the sub-indices, recording improvement from the previous quarter (59.3), it added. 

The number is significantly higher than the 50 mark, signalling a strong expectation of improvement in the funding liquidity in the Indian financial system. 

“Funding liquidity index has shown the maximum upward movement indicating the liquidity position would be comfortable and banks are in a position to meet the credit demands of the productive and needy sectors,” Indian Banks Association Chairman Rajeev Rishi said in the statement.