‘CII – IBA Financial Conditions Index – Level of Optimism Continues’

New Delhi: The CII-IBA Financial Conditions Index for Q3 FY 2019-20 has recorded an index value of 68.9 thus showcasing an overall optimism for the fourth time in a row. The optimistic expectation mainly owes to three factors namely External Financial Linkages, Funding Liquidity Index, and Cost of Funds Index.

A total of 22 entities participated in the Survey which includes 10 Public Sector Banks, 05 Private Sector Banks, 02 Foreign Banks, and 01 Cooperative Bank. Representing other financial institutions, 04 leading NBFCs participated in the Survey.

Releasing the index for the third quarter of 2019-20, Mr Chandrajit Banerjee, Director General, CII said “India has undertaken important reforms in the last few years in terms of monitoring of financial assets, the bankruptcy process through IBC, amongst others. RBI, in the recent past has been cutting down the repo rate and it is expected that further rate cut could take place in December. CII feels along with undertaking measures to support the economy, it is also equally important to focus on faster transmission of lower rates to consumers through Banks for a sustainable credit flow into the economy”.

On the third quarter of CII-IBA Financial Condition Index, Mr V G Kannan, Chief Executive, IBA observed that “the liquidity position and lower cost of funds augur for a pickup in credit and economic growth. However, so far, this has not materialized. In the index reading also, the economic activity sub index has the lowest reading as compared to other three sub-indices. With external benchmark lending rate effective from October, banks have transmitted the lower rate to the customers and also offered several festive season discounts for several loan products. However, second quarter GDP numbers has also indicated slowdown in growth engines. The stimulus measures announced by the government for various sectors are expected to help in improving the investment demand in the coming quarters”

Among the sub-indices, the highest contribution was made by the Cost of Funds Index recording a value of 77.8 . The majority of the respondent banks and financial institutions expect the short-term interest rates (the interbank call rate & 3-month bank certificate of deposit rate), Long-term interest rate – Yield on 10 Year GoI Bond and conditions of Marginal Cost of Funds based Lending Rate to come down indicating improvement in the Cost of Funds Index .

The Funding Liquidity Index in the current quarter recorded a value of 72.7, which has improved marginally in comparison to the previous quarter. This index depicts the likely liquidity position in the market. Within the Funding Liquidity Index , Mobilization of Equity Market recorded the highest value of 86, followed by the Issuance in Corporate Bond Market which registered a value of 80. The mobilization in Money Market was recorded at 64 while the Liquidity Adjustment Facility registered a value of 61.

The External Financial Linkages Index has recorded a value of 71 which is marginally lower in comparison to the previous quarter. The value registered is extremely optimistic and is largely due to an optimistic expectation of increase in Foreign Exchange Reserve, Mobilization through ADRs, GDRs, ECBs & FCCBs and Net Capital Inflows – FIIs having recorded values of 86, 84 and 86 respectively.

The Economic Activity Index recorded a value of 54 which indicates moderate optimism for the quarter. According to the survey, this value of Economic Activity Index is supported by the optimism regarding the growth in GDP, Asset Prices and Non-Food Bank Credit having registered a value of 59, 55 and 80.

The CII – IBA Financial Conditions Index was launched in April 2015 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.