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Developments in Commercial Banking (Part 1 of 4)

 

Overview

During 1997-98 deposits as well as credit of Scheduled Commercial Banks (SCBs) recorded substantial increases as against the deceleration in credit flow in the preceding few years.  In general, banks had sufficient liquidity throughout the year.  However, in response to the effects engendered by the South-East Asian crisis and in order to curb speculative tendencies in the foreign exchange market, a number of monetary and credit policy measures were taken in January 1998.  These measures were rolled back as orderly conditions resumed.  Overall the operations of banks were relatively unaffected by these measures and these were reflected in their better financial performance during 1997-98.  The South-East Asian crisis has been a major wake up' call especially to supervisors in all countries in the region.
 
2.2   The performance of  SCBs has shown a distinct improvement in terms of their operating and net profits in 1997-98.  Besides, banks were able to reduce their level of NPAs and enhance their capital adequacy ratios.  With interest rate deregulation and consequent collapsing of rates on term deposits of shorter term maturities as also the lower credit-deposit ratios, the spread of banks declined during 1997-98.  However, as a result of lower provisions on account of mark to market of investment portfolios and relatively lower intermediation cost, banks were in general able to obtain relatively higher profits - gross and net during 1997-98.  Excluding interest income from recapitalisation bonds, the net profit ratios of nationalised banks would be only one-half of their present net profit ratios and the number of nationalised banks that would be in red would increase from two to four. Fourteen public sector banks (PSBs) out of 27 qualified for the autonomy package announced by the Union Government.
CHAPTER II
 

DEVELOPMENTS IN COMMERCIAL BANKING

2.   Liability and Asset Structure of Banks

Deposits
 
2.3   Aggregate deposits of SCBs  showed a sustained rise during 1997-98. The aggregate deposits of SCBs increased by Rs.99,811 crore (19.7 per cent) during the financial year as compared with the rise Rs.71,780 crore (16.5 per cent) in the preceding year (Table II.1). Among the components of aggregate deposits, there has been a significant growth in time deposits component during the year.
 
Chart II.1 :
Flow of bank funds to Commercial
Sector-1996-97 and 1997-98 (Sept. -March)
 
chart II.1
 
Bank Credit
 
2.4   During 1997-98, bank credit recorded an increase of Rs.45,677 crore (16.4 per cent) as compared with the rise of Rs.24,387 crore (9.6 per cent) in 1996-97 (Table II.1). Food credit also recorded a rise of Rs.4,888 crore (64.3 per cent) during 1997-98 as against the decline of Rs.2,194 crore (-22.4 per cent) in the previous year.  The increase in non-food credit at Rs.40,789 crore (15.1 per cent) in 1997-98 was far higher than the increase of Rs.26,581 crore (10.9 per cent) in the previous year. Non-food credit growth which was relatively subdued in the first half of 1997-98 started picking up in the second half.  Since conventional non-food credit alone does not give a full picture of the support of the banking system to the commercial sector, it is necessary to take into account SCBs' other investments' i.e., investments in bonds/debentures/shares issued by Public Sector Undertakings (PSUs)/private corporate sector and Commercial Paper. Together, the increase in flow of funds by SCBs to commercial sector aggregated to Rs.53,662 crore (18.4 per cent) during 1997-98 as compared with Rs.31,606 crore (12.2 per cent) in 1996-971  (Chart II.1). SCBs incremental other investments' increased from Rs. 4,370 crore in 1996-97 to Rs. 13,673 crore in 1997-98 (Chart II.2).
 
2.5   During the first six months of the current financial year i.e. April-September, 1998 aggregate deposit growth [Rs.58,595 crore (9.7 per cent)] was higher than the corresponding growth of Rs.40,949 crore (8.1 per cent) in similar period last year (Table II.1). Within the aggregate deposits, demand deposits declined during this period, while time deposits growth contributed entirely to the total growth of aggregate deposits, reflecting the contribution of Resurgent India Bonds, increasing interest sensitivity of time deposits and the liquidity preference of depositors.  During the first 6 months of the current financial year, i.e., April-September, 1998, non-food credit increased by Rs.459 crore (0.1 per cent) as compared with a meagre increase of Rs.26 crore in similar period last year.  Together with other investments' and bills rediscounted with Financial Institutions, the flow of funds by SCBs to commercial sector increased by Rs.8,386 crore up to the end of September 1998 as compared with an increase of Rs.6,929 crore during the same period last year.
 
Chart II.2 :
Scheduled Commercial  Banks' Investments in CPs, Bond, Share, and Debentures :
Sept. 1996 - Sept. 1998
 
chart II.2
 
1These figures are inclusive of bills redicounted by banks with Financial Institution

Table II.1: Important Banking Indicators - Scheduled Commercial Banks - 1996-97 and 1997-98
(Amount in Rs. crore)
               

 ItemsOutstanding as on Variations Variations
        during the during the
        financial period
   
 
 
 
 
 year
 (April- September)
  MarchMarchMarchSeptSept 1996-97 1997-98 1997-98 1998-99*
  29,199628,199727,199826,199725,1998*  
  
  
  
        over over over over
        March March March March
        29 28 28 27

1 23456 7 8 9 10
        (3 - 2) (4 - 3) (5 - 3) (6 - 4)

1.Total Demand and Time              
 Liabilities @4,80,6135,61,9826,78,7316,09,3247,45,258 81,369 1,16,749 47,342 66,527
2.Aggregate Deposits (a+b)4,33,8195,05,5996,05,4105,46,5486,64,005 71,780 99,811 40,949 58,595
        (16.5) (19.7) (8.1) (9.7)
 (a)  Demand Deposits80,61490,6101,02,51390,26799,513 9,996 11,903 -343 -3,000
        (12.4) (13.1) (-0.4) (-2.9)
 (b)  Time Deposits3,53,2054,14,9895,02,8974,56,2815,64,492 61,784 87,908 41,292 61,595
        (17.5) (21.2) (10.0) (12.2)
2.1Certificate of Deposits16,31612,13414,2967,7957,886 -4,182 2,162 -4,339 -6,410
        (-25.6) (17.8) (-35.8) (-44.8)
2.2Aggregate Deposits 4,17,5034,93,4655,91,1145,38,7536,56,119 75,962 97,649 45,288 65,005
 (Excluding Certificate of       (18.2) (19.8) (9.2) (11.0)
 Deposits)             
3.Borrowings from RBI4,8475603953063,306 -4,287 -165 -254 2,911
        (-88.4) (-29.5) (-45.4) (737.0)
4.Liability to Banks17,64821,19332,28727,69936,776 3,545 11,094 6,506 4,489
        (20.1) (52.3) (30.7) (13.9)
5.Bank Credit (a+b)2,54,0152,78,4023,24,0792,79,7343,28,132 24,387 45,677 1,332 4,053
        (9.6) (16.4) (0.5) (1.3)
 (a)  Food Credit9,7917,59712,4858,90316,079 -2.194 4,888 1,306 3,594
        (-22.4) (64.3) (17.2) (28.8)
 (b)  Non-food Credit2,44,2242,70,8053,11,5942,70,8313,12,053 26,581 40,789 26 459
        (10.9) (15.1) (0.0) (0.1)
 (c)  Non-food credit 2,42,7142,68,5513,08,9022,69,9083,09,878 25,837 40,351 1,357 976
 excluding petroleum       (10.6) (15.0) (0.5) (0.3)
 credit             
6.Investments (a+b)1,64,7821,90,5142,18,7052,11,8922,51,559 25,732 28,191 21,378 32,854
        (15.6) (14.8) (11.2) (15.0)
 (a)  Government Securities1,32,2271,58,8901,86,9571,81,5062,19,901 26,663 28,067 22,616 32,944
        (20.2) (17.7) (14.2) (17.6)
 (b)  Other Approved Securities 32,55531,62431,74830,38631,658 -931 124 -1,238 -90
        (-2.9) (0.4) (-3.9) (-0.3)
7.Cash Balances (a+b)53,78053,19561,30660,18866,600 -585 8,111 6,993 5,294
        (-1.1) (15.2) (13.1) (8.6)
 (a)  Cash in hand3,1133,3473,6083,4173,805 234 261 70 197
        (7.5) (7.8) (2.1) (5.5)
 (b)  Balances with RBI50,66749,84857,69856,77162,795 -819 7,850 6,923 5,097
        (-1.6) (15.7) (13.9) (8.8)
               
 Memorandum Items :             
A.Other Investments15,04119,41133,08426,02240,095 4,370 13,673 6,611 7,011
B.Credit-Deposit Ratio58.655.153.551.249.4        
C.Non-food credit 55.953.151.049.446.7        
 (excluding petroleum              
 credit)/ Deposit ratio             
D.Incremental Credit-90.434.045.83.36.9        
 Deposit Ratio             
E.Cash Balances-Deposit Ratio12.410.510.111.010.0        
F.Investment/Deposit Ratio38.037.736.138.837.9        
G.Investment + Credit/             
 Deposit Ratio96.592.789.790.087.3        

 @ Excluding borrowings from RBI/IDBI/NABARD.          * Provisional.
 Notes: 1. Figures in brackets are percentage variations.
  2. Constituent items may not add up to the totals due to rounding off.
  3. No sign is indicated for positive variations.

2.6   During 1997-98, 41 per cent (32.6 per cent last year) of the incremental non-food gross bank credit went to medium and large industry, 40.2 per cent (39.4 per cent last year) to priority sector, 2.4 per cent (1.2 per cent last year) to wholesale trade and the remaining 16.4 per cent (26.8 per cent last year) to other sectors (Table II.2). Real estate loans which is a component of other sectors received only a negligible proportion (1 per cent) of incremental non-food credit in 1997-98.  Within the industrial sector substantial increase in bank credit was evidenced in respect of Iron and Steel (Rs.4,099 crore as compared with Rs.3,186 crore in 1996-97), Electricity (Rs.1,146 crore as compared to Rs.803 crore in 1996-97), Cotton Textiles (Rs.1,278 crore as compared with Rs.461 crore in 1996-97), Chemicals (Rs.2,727 crore as  against a decline of Rs.1,057 crore in 1996-97) and Petroleum (Rs. 2,781 crore as compared with Rs.1,864 crore in 1996-97) (Table II.3). The industries which witnessed substantial decline/deceleration in bank credit included Electronics (a decline of Rs.227 crore over and above the decline of Rs.577 crore in 1996-97), other Metal and Metal products (a decline of Rs.83 crore as against the rise of Rs.1,299 crore in 1996-97).During the first quarter of 1998-99 (April - June 1998), credit to industrial sector declined by Rs.6,492 crore as compared with a decline of Rs.3,767 crore in similar period last year with significant decline in the case of Engineering , Petroleum and Iron and Steel industries.
 
Export Credit
 
2.7   The total export credit outstanding of scheduled commercial banks as on the last reporting Friday of March 1998 stood at Rs.34,430 crore forming 10.6 per cent of total outstanding net bank credit (NBC) as against the outstanding export credit of Rs.30,112 crore or 10.8 per cent of NBC as on March 28, 1997.
 
2.8   During 1997-98 (April-March), export credit refinance limits of SCBs declined significantly from Rs.6,654 crore for the fortnight ended March 28, 1997 to Rs.2,403 crore for the fortnight ended March 27, 1998, before increasing to Rs.4,925 crore for the fortnight ended September 25, 1998 (Appendix Table II.1).  Utilisation of export credit refinance was generally low during 1997-98. The average utilisation attained a peak of 86.2 per cent for the fortnight ended January 30, 1998 and declined thereafter to 2.2 per cent for the fortnight ended March 27, 1998.  The low level of utilisation of export credit refinance may be attributed to the easy conditions in the call money market reflecting the comfortable overall liquidity situation. The average utilisation for the fortnight ended September 25, 1998 rose to 93.9 per cent. This increase was mainly an account of reduction in interest rate an export credit refinance from 9.0 per cent to 7.0 per cent per annum effective August 6, 1998.

Table II.2: Sectoral Deployment of Gross Bank Credit by Major Sectors
(Amount in Rs.crore)
                

SectorsOutstanding as on
 Variations during
   March 29, March 28, March 27, June 20,June 19, Financial year
 April - June
   19961997199819971998* 1996-97 1997-98 1997-98 1998-99*

1 23456 7 8 9 10
        (3 - 2) (4 - 3) (5 - 3) (6 - 4)

I.Gross Bank Credit  (1+2)2,31,8602,58,9913,00,2832,53,2452,95,373 27,131 41,292 -5,746 -4,910
 1.Public Food Procurement             
  Credit9,7917,59712,48510,07516,828 -2,194 4,888 2,478 4,343
 2.Non-Food Gross Bank 222,069251,394287,798243,170278,545 29,325 36,404 -8,224 -9,253
  Credit  (A+B+C+D))      (100.0) (100.0) (100.0) (100.0)
 A.Priority Sectors73,32984,88099,50784,07098,064 11,551 14,627 -810 -1,443
         (39.4) (40.2) (9.8) (15.6)
 (i)Agriculture27,04431,44234,86931,16934,448 4,398 3,427 -273 -421
         (15.0) (9.4) (3.3) (4.5)
 (ii)Small Scale Industries31,88435,94443,50835,28942,374 4,060 7,564 -655 -1,134
         (13.8) (20.8) (8.0) (12.3)
 (iii)Other Priority Sectors14,40117,49421,13017,61221,242 3,093 3,636 118 112
         (10.5) (10.0) (-1.4) (-1.2)
 B.Industry (Medium &93,0531,02,6041,17,53099,4921,12,172 9,551 14,926 -3,112 -5,358
  Large)      (32.6) (41.0) (37.8) (57.9)
 C. Wholesale Trade (Other11,98012,34013,21711,80612,937 360 877 -534 -280
  than food procurement)    (1.2) (2.4) (6.5) (3.0)  
  of  which:             
 (i)Cotton Corporation of India3812943053283 -87 11 -262 -222
         (-0.3) (0.0) (3.2) (2.4)
 (ii)Jute Corporation of India0033016 0 33 0 -17
         (0.0) (0.1) (0.0) (0.2)
 (iii) Other Trade11,59912,04612,87911,77412,838 447 833 -272 -41
         (1.5) (2.3) (3.3) (0.4)
 D.Other Sectors43,70751,57057,54447,80255,372 7,863 5,974 -3,768 -2,172
  of which :      (26.8) (16.4) (45.8) (23.5)
 (i)Housing6,3037,7739,0577,3849,020 1,470 1,284 -389 -37
         (5.0) (3.5) (4.7) (0.4)
 (ii)Consumer durables1,4762,2972,5271,9402,679 821 230 -357 152
         (2.8) (0.6) (4.3) (-1.6)
 (iii)Non-banking financial 3,3865,1546,2275,6005,375 1,768 1,073 446 -852
  companies      (6.0) (2.9) (-5.4) (9.2)
 (iv)Loans to individuals1,9332,0661,9041,6622,603 133 -162 -404 699
         (0.5) (-0.4) (4.9) (-7.6)
 (v)Real Estate Loans1,1731,5461,8991,8382,104 373 353 292 205
         (1.3) (1.0) (-3.6) (-2.2)
 (vi)Other non-priority sector12,56912,39210,1339,7399,240 -177 -2,259 -2,653 -893
  personal loans      (-0.6) (-6.2) (32.3) (9.7)
 (vii)Advances against FixedN.A.1,50511,81510,32812,139 - 10,310 8,823 324
  Deposits             
 (viii)Tourism and tourismN.A.N.A.8220423 - - - -399
  related hotels             
II.Export Credit 29,59030,00833,94728,30731,671 418 3,939 -1,701 -2,276
 (included under  item I.2)             
IIINet Bank Credit 2,28,1982,45,9992,97,2652,50,4012,92,782 17,801 51,266 4,402 -4,483
 (including inter-bank participation)            
 Memorandum Items:             
 A.Priority Sector Credit as %              
  to NBC32.134.533.533.633.5        
 B.Agricultural Sector Credit              
  as % to NBC11.912.811.712.411.8        
 C. Export Sector Credit as %              
  to NBC13.012.211.411.310.8        

 * Data are Provisional.
 Notes : 1.Data relate to selected scheduled commercial banks which account for about 90-95 per cent of bank credit for all scheduled commercial banks. Gross bank credit data include bills rediscounted with RBI, IDBI, EXIM Bank, other approved financial institutions and inter-bank participations. Net bank credit data are exclusive of bills rediscounted with RBI,  IDBI, EXIM Bank and other approved financial institutions.
 2.Figures in brackets are proportions to incremental non-food gross bank credit.

Table II.3: Industry-Wise Deployment of Gross Bank Credit
(Amount in Rs. crore)


IndustryOutstanding as on
 Variations during
 Mar.29,Mar.28,March 27,June 20,June 19, Financial year
 April - June
 19961997199819971998* 1996-97 1997-98 1997-98 1998-99*

123456 7 8 9 10
       (3 - 2) (4 - 3) (5 - 3) (6 - 4)

Industry (Total of Small, Medium 1,24,9371,38,5481,61,0381,34,7811,54,546 13,611 22,490 -3,767 -6,492
and Large Scale)             
1.Coal488570801672729 82 231 102 -72
2.MiningN.A.65975733937 - 910 668 -38
3.Iron and Steel8,48211,66815,76712,14815,405 3,186 4,099 480 -362
4.Other Metal and Metal Products3,9775,2765,1934,7785,302 1,299 -83 -498 109
5.All Engineering25,62122,68422,83321,45220,832 -2,937 149 -1,232 -2,001
 of which : Electronics(5,276)(4,699)(4,472)(3,933)(4,511) (-577) (-227) (-766) (39)
6.Electricity 2,7033,5064,6523,4685,129 803 1,146 -38 477
7.Cotton Textiles 7,5928,0539,3317,9149,363 461 1,278 -139 32
8.Jute Textiles6055431,0895341,105 -62 546 -9 16
9.Other Textiles7,8029,68510,6519,4929,927 1,883 966 -193 -724
10.Sugar3,2992,5472,9592,5962,824 -752 412 49 -135
11. Tea1,3138141,0288391,035 -499 214 25 7
12. Food Processing3,1033,6554,1343,6984,326 552 479 43 192
13. Vegetable Oils (including 1,5651,9552,2961,9782,365 390 341 23 69
Vanaspati)             
14. Tobacco and Tobacco Products1,0099341,0769341,007 -75 142 0 -69
15. Paper and Paper Products2,3662,5802,7422,5272,905 214 162 -53 163
16. Rubber and Rubber Products1,7481,8172,5341,7922,277 69 717 -25 -257
17. Chemicals, Dyes, Paints, etc.16,45015,39318,12014,74217,610 -1,057 2,727 -651 -510
 of which :             
   i)Fertilisers(2,108)(2,358)(2,910)(2,224)(2,994) (250) (552) (-134) (84)
  ii)Petrochemicals(1,633)(1,923)(2,956)(1,715)(3,029) (290) (1,033) (-208) (73)
 iii)Drugs and Pharmaceuticals(2,367)(3,672)(5,219)(3,703)(5,142) (1,305) (1,547) (31) (-77)
18. Cement1,7441,9182,5021,9452,655 174 584 27 153
19. Leather and Leather Products2,2792,2252,4782,1662,547 -54 253 -59 69
20. Gems and Jewellery2,7853,0963,5303,0683,422 311 434 -28 -108
21. Construction1,8542,4942,6462,6592,326 640 152 165 -320
22. Petroleum1,5103,3746,1553,1544,318 1,864 2,781 -220 -1,837
23. SAFAUNS $20000 -2 0 0 0
24. Automobiles including trucks N.A.N.A.2,870N.A.2,827 - - - -43
25. Computer softwareN.A.N.A.616N.A.673 - - - 57
26. InfrastructureN.A.N.A.3,163N.A.3,998 - - - 835
 of which :             
 (i)PowerN.A.N.A.(697)N.A.(982) - - - (285)
 (ii)TelecommunicationsN.A.N.A.(2,045)N.A.(2,442) - - - (397)
 (iii)Roads and PortsN.A.N.A.(421)N.A.(574) - - - (153)
27. Other Industries26,64033,69630,89731,49228,702 7,056 -2,799 -2,204 -2,195
Memorandum Item :             
Industrial Credit as proportion to             
Net Bank Credit54.756.354.253.852.8        

 *Data are provisional.
 $Ships aquired from abroad under new scheme.

Notes :1.Data relate to selected scheduled commercial banks which account for  about 90-95 per cent of bank credit of all scheduled conmercial banks. Gross bank credit data include bills rediscounted with RBI, IDBI, EXIM Bank and other approved financial institutions.
 2.No sign is indicated for positive variations.

Bank Credit to Sick/Weak Industries
 
2.9   There has been a perceptible fall in the number of sick/weak units financed by banks (from 2,64,750 at end-March 1996 to 2,37,400 at end-March 1997) (Appendix Table II.2).  As a proportion of industrial credit, bank credit locked up in sick/weak units declined from
11.0 per cent at end-March 1996 to 10.2 per cent at end-March 1997.  The bank credit locked up in Small-Scale sick industries and Non-SSI sick units also showed a perceptible decline during 1996-97.
 
Flow of Credit to the Small Scale Industries Sector
 
2.10   The flow of credit to small-scale industries has been a major area of interest.  The one-man committee set up by the Reserve Bank in December 1997 under Shri S.L. Kapur (Chairman) to review the working of the credit delivery system for small-scale industries (SSIs) with a view to making the system more effective, simple and efficient to administer, submitted its report on June 30, 1998. The main recommendations have been discussed in Chapter I.

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