Macro-economic overview of India

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India is just about opened up its insurance sector to private and foreign investors. See report.

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India's currency, the rupee, is convertible on current account. That amounts to full convertibility  as far as business is concerned.

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The Asian financial crisis did not hit India precisely because the Indian rupee was not floated in a hurry, like Thailand's baht was.

  A report by Amitabha Sen

• In India there are 100 commercial banks, 196 regional rural banks (RRB), 51 urban cooperative banks (UCB) and 16 state cooperative banks (SCB) at the end fiscal year 2000-01 (March to April is India’s fiscal year).

• The central banking authorities are in phases implementing prudential and supervisory norms matching the best international practices.

• The on-going economic reforms in the country aims at ensuring greater operational flexibility to commercial banks.

• Total investments of banks in shares, convertible debentures/bonds and bonds of equity-oriented mutual funds should not exceed 20 percent of their net worth.

• A consolidated balancesheet of Indian banking sector reveals that scheduled commercial banks (excluding RRBs) closed FY 2000-01 with higher operating expenses leading to fall in net profits, lower ‘other income’ and higher provisions for bad doubtful accounts (normally known as sticky accounts) and contingencies.

• Indian banking sector registered 14.9 percent growth in income and 16.7 percent growth in expenditure during 2000-01 FY. Growth  in other income which constitutes a big chunk of banking sector’s total income, suffered significantly with 8.8 percent compared with 23.5 percent in 1999-2000 FY. On the other hand operating expenditures shot up by 23.9 percent  from 8.8 percent.

• The State bank group and state-run banks registered 15.8 percent and 12.7 percent, respectively, growth in income during FY 2000-01. While foreign banks witnessed 16 percent growth in income, new and old and private sector Indian banks recorded income growth of 38.8 percent and 9.8 percent, respectively.

• Most of the bank groups registered increase in net interest income known as spread. The average spread increased to 2.84 percent in FY 2000-01 from 2.73 percent in FY 1999-2000. While nationalised and new private banks registered higher spread by 24 percent and 19 percent, respectively, in respect of foreign banks, the spread declined by 0.28 percent. The State bank group’s spread remained static at 2.76 percent in FY 2000-01.

• The growth in non-performing assets of scheduled commercial banks remained unchecked. The gross non-performing assets of scheduled commercial banks stood at Rs 63,883 crore at the end of 2000-01 FY compared with Rs 60,408 crore in FY 1999-2000. Net NPAs amounted to Rs 32,468 crore at the end of FY 2000-01 compared with Rs 30,073 crore in FY 1999-2000. Gross NPA increased to Rs  54,773 crore (Rs 53,033 crore) for public sector banks, to Rs 6,039 crore (Rs 4,761 crore) for private sector banks and to Rs 3,071 crore (Rs 2,614 crore) for foreign banks operating in India.

• The ratio of gross and net NPAs to total assets of scheduled commercial banks however declined to  4.9 percent in FY 2000-01 from 5.5 percent in FY 1999-2000.

• Expenditure of scheduled commercial banks as a whole increased by 16.7 percent. However, highest increase (41.9 percent) in expenditure was recorded by new private sector banks. In respect of State Bank group and foreign banks, the increase was 18.6 percent and 17.9 percent, respectively. Old private sector banks registered 11.4 percent increase in expenditure.

• One of the major reasons that fuelled significant increase in bank expenditure is wage. The wage bill of scheduled commercial banks was up by 25.8 percent. Among various bank groups, private sector banks recorded highest increase of 52.3 percent followed by State Bank group’s 31.4 percent. Old private sector banks recorded lowest increase of 2 percent. The ratio of wage bill to total assets of commercial banks increased to 1.79 percent in FY 2000-01 from 1.67 percent in FY 1999-2000. Foreign banks however could lower the wage bill to asset ratio to 1.23 percent in FY 2000-01 from 1.39 percent in FY 1999-2000.

• Assets of scheduled commercial banks (excluding RRBs) have increased by 17.1 percent in 2000-01 FY- up by 0.8 percent over previous fiscal’s 16.3 percent. In terms of assets holding, the public sector banks account for 48.4 percent and the State Bank of India 31.1 percent. Foreign banks account for 7.9 percent and the Indian private sector banks (old and new) hold 12.6 percent.

• Shares of investments in total assets during FY 2000-01 stood at 38 percent and loans and advances together at 40.6 percent.

• Capital of scheduled commercial banks in total liabilities declined by 0.2 percent at 1.5 percent  during 2000-01 FY from previous fiscal’s 1.7 percent. Reserves and surplus  dropped marginally by 0.1 percent at 3.8 percent from 3.9 percent in FY 1999-2000.

• There was decline in banks’ cash-reserve ratio during the fiscal 2000-01 at 6.8 percent from 7.7 percent in fiscal 1999-2000.

• The credit-deposit ration as per sanctions) was higher at 58.5 percent in FY 2000-01 compared with 56 percent.

• Scheduled commercial banks registered 18.4 percent growth in deposits in FY 2000-01 which is about 5 percent higher than previous fiscal’s 13.9 percent.

• The deposit growth include the inflow of Rs 25,662 crore under the India Millennium Deposits (IMD) schemes. The IMD deposit accounts for 3.2 percent of total bank deposit growth in FY 2000-01.

• Total bank credit extended by the scheduled commercial bank in FY 2000-01 was up by 17.3 percent against 18.2 in FY 1999-2000. Food credit increased by 55.7 percent and non-food credit by 14.9 percent. Credit-deposit ratio in terms of outstanding stood marginally lower at 53.1 percent compared with 53.6 percent in previous fiscal.

• Investments of banks in government and other approved securities increased by 19.8 percent against  21.3 percent in FY 1999-2000. On incremental basis, investments were up by 41 percent. The investment-deposit ratio, on an outstanding basis, was marginally up at 38.5 percent against 38 percent  in FY 1999-2000.

• Total flow of resources from scheduled commercial banks to the commercial sector (excluding food credit) was up by 16.1 percent. The increase was however lower than 17.8 percent growth registered in FY 1999-2000.

• Industrial credit as a percentage to net bank credit in FY 2000-01 declined by over 3 percent to 46.8 percent from 50.3 percent. Growth in industrial credit decelerated to 9.3 percent from 11.8 percent in FY 1999-2000.

• Bank credit to medium and large  industries together was lower by 10.5 percent in FY 2000-01 compared with 12.9 percent in the previous fiscal year. Credit to wholesale trade  significantly  decelerated to 6.1 percent  against 20.4 percent in FY 1999-2000. Credit to real estate sector accelerated. Credit to priority sector increased by 17.1 percent in FY 2000-01 against 15 percent in FY 1999-2000.

• In terms of credit growth, infrastructure tops the list with 56.7 percent followed petroleum 29 percent, gems and jewelleries 21.7 percent, electricity 15.5 percent and cotton textiles 13.4 percent. Among 7 industries that witnessed major declines in bank credit absorption include ‘other textiles’ (7.6 percent), drugs and pharmaceuticals (5.3 percent).

• Bank credit to sick/weak industries in FY 2000-01 was higher at 11.9 percent compared with previous fiscal year’s 10.9 percent.

• The operating profit of all scheduled commercial banks together increased by 7.9 percent. Operating profits by public sector banks was up by 5.8 percent but State Bank group  registered 1.7 percent decline in operating profit. Profits of old banks increased by 11 percent and new banks by 10.1 percent. Foreign banks operating in India registered 15.6 percent increase in operating profit.

• Scheduled commercial banks’ net profit dropped by 11.3 percent in FY 2000-01. The decline in case of public sector banks and foreign banks was 15.6 percent and 2.4 percent, respectively. Only the new private sector banks registered 12.3 percent in net profits.

• The ratio of net profit to total asset declined further to 0.50 percent in FY 2000-01 from 0.66 percent in 1999-2000. The decline in case of public sector bank was 0.15 percent, in the case of old bank decline was 0.19 percent. In respect of foreign banks net profit to total asset ratio declined to 0.93 in FY 2000-01 from 1.17 percent in FY 1999-2000.

• The Indian government has decided  to dilute its stake in public sector banks to 33 percent.

• The Narasimhan Committee had suggested mergers among strong Indian banks, both public and private. The Committee also suggested merger with financial institutions and non-banking financial institutions (NBFCs). Among banks whose shares are being traded, Karur Vysya Bank's scrip registered highest growth of 47.48 percent followed by Corporation Bank's 44.11 percent and Bank of Baroda's 31.41 percent in 2000-01 compared with previous year's. Among those whose share prices nosedived include Global trust Bank (-56.65 percent) followed by IndusInd Bank (-49.64 percent).

• The Reserve Bank of India has decided to divest its stake in various public sector institutions. These institutions include State Bank of India (SBI), National Housing Bank (NHB), Infrastructure Development Finance Company (IDFC), Deposit Insurance and Credit Gurantee Corporation (DICGC), NABARD, Bharatiya Reserve Bank Note Mudran Ltd, Discount and Finance House of India (DFHI), and Securities and Trading Corporation of India (STCI).

• RBI Deputy Governor Y V Reddy suggested formation of a holding company for public sector banks.

• Privatisation of public sector banks would take off once the existing banking Acts (Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949) are amended. RBI has already sent recommendations to the federal government to this effect.

Consolidated Balance Sheet of Scheduled Commercial Banks
(In Rs crore)

Deployment of Gross Bank  Credit   in Indian Industries
(In Rs crore)

Changes in share prices of Indian Banks

Mergers in Banking Sector in India: 1998-2001

Gross and Net NPAs of Scheduled Commercial  Banks
(In Rs crore)

Gross and Net NPAs of Public  Sector  Banks
(In Rs crore)

Gross and Net NPAs of India's Private Sector Banks
(In Rs crore)

Gross and Net NPAs of Foreign Banks operating in India
(In Rs crore)

Secondary market reforms

Among the secondary market reforms undertaken are

• Daily margin on carry forward trade reduced to 10% from 15%, 50% of which is to be collected up-front either in cash or in the form of bank guarantee.

• Overall carry forward limit enhanced to Rs. 20 crore per broker.

• The limit of Rs.10 crore for a financier to be eliminated.

• Shares received by Vyaj Badla financiers to continue to be deposited with the clearinghouse as earlier.

• Stock exchanges to arrange for proper insurance cover for aggregate value of shares lying in the clearinghouse.

• Institutional investors with portfolio worth more than Rs. 10 crore required to compulsorily trade in and settle only in dematerialised form eight scrips with effect from January 15, 1998. The list was expanded to thirty scrips recently, with another twenty slated for inclusion by August 1998.

The capital market continued to remain dormant in 1997-98. Resource mobilisation from the primary market through public issues steadily declined to Rs. 14276 crore in 1996-97 and further down to Rs. 4570 crore in 1997-98. The secondary market witnessed net FII sales for the first time in November 1997. Though net FII investment remained negative in December, 1997 and January, 1998, it was positive in both February and March, 1998. Resource mobilisation by mutual funds improved but their performance was affected by depressed market conditions. The introduction of a government Capital Indexed Bond provided a new financial instrument for investors to hedge their principal against inflation. However, the amount mobilised was rather modest at about Rs. 705 crore, which perhaps reflected low inflationary expectations.

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