Developments in Commercial Banking (Part 1 of 4)

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ਪ੍ਰਕਾਸ਼ਿਤ ਤਾਰੀਖ ਨਵੰਬਰ 11, 1998

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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)

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

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)



	Items	Outstanding as on					Variations		Variations
							during the		during the
							financial		period
							year		(April- September)
		March	March	March	Sept	Sept	1996-97	1997-98	1997-98	1998-99*
		29,1996	28,1997	27,1998	26,1997	25,1998*
							over	over	over	over
							March	March	March	March
							29	28	28	27

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

1.	Total Demand and Time
	Liabilities @	4,80,613	5,61,982	6,78,731	6,09,324	7,45,258	81,369	1,16,749	47,342	66,527
2.	Aggregate Deposits (a+b)	4,33,819	5,05,599	6,05,410	5,46,548	6,64,005	71,780	99,811	40,949	58,595
							(16.5)	(19.7)	(8.1)	(9.7)
	(a) Demand Deposits	80,614	90,610	1,02,513	90,267	99,513	9,996	11,903	-343	-3,000
							(12.4)	(13.1)	(-0.4)	(-2.9)
	(b) Time Deposits	3,53,205	4,14,989	5,02,897	4,56,281	5,64,492	61,784	87,908	41,292	61,595
							(17.5)	(21.2)	(10.0)	(12.2)
2.1	Certificate of Deposits	16,316	12,134	14,296	7,795	7,886	-4,182	2,162	-4,339	-6,410
							(-25.6)	(17.8)	(-35.8)	(-44.8)
2.2	Aggregate Deposits	4,17,503	4,93,465	5,91,114	5,38,753	6,56,119	75,962	97,649	45,288	65,005
	(Excluding Certificate of						(18.2)	(19.8)	(9.2)	(11.0)
	Deposits)
3.	Borrowings from RBI	4,847	560	395	306	3,306	-4,287	-165	-254	2,911
							(-88.4)	(-29.5)	(-45.4)	(737.0)
4.	Liability to Banks	17,648	21,193	32,287	27,699	36,776	3,545	11,094	6,506	4,489
							(20.1)	(52.3)	(30.7)	(13.9)
5.	Bank Credit (a+b)	2,54,015	2,78,402	3,24,079	2,79,734	3,28,132	24,387	45,677	1,332	4,053
							(9.6)	(16.4)	(0.5)	(1.3)
	(a) Food Credit	9,791	7,597	12,485	8,903	16,079	-2.194	4,888	1,306	3,594
							(-22.4)	(64.3)	(17.2)	(28.8)
	(b) Non-food Credit	2,44,224	2,70,805	3,11,594	2,70,831	3,12,053	26,581	40,789	26	459
							(10.9)	(15.1)	(0.0)	(0.1)
	(c) Non-food credit	2,42,714	2,68,551	3,08,902	2,69,908	3,09,878	25,837	40,351	1,357	976
	excluding petroleum						(10.6)	(15.0)	(0.5)	(0.3)
	credit
6.	Investments (a+b)	1,64,782	1,90,514	2,18,705	2,11,892	2,51,559	25,732	28,191	21,378	32,854
							(15.6)	(14.8)	(11.2)	(15.0)
	(a) Government Securities	1,32,227	1,58,890	1,86,957	1,81,506	2,19,901	26,663	28,067	22,616	32,944
							(20.2)	(17.7)	(14.2)	(17.6)
	(b) Other Approved Securities	32,555	31,624	31,748	30,386	31,658	-931	124	-1,238	-90
							(-2.9)	(0.4)	(-3.9)	(-0.3)
7.	Cash Balances (a+b)	53,780	53,195	61,306	60,188	66,600	-585	8,111	6,993	5,294
							(-1.1)	(15.2)	(13.1)	(8.6)
	(a) Cash in hand	3,113	3,347	3,608	3,417	3,805	234	261	70	197
							(7.5)	(7.8)	(2.1)	(5.5)
	(b) Balances with RBI	50,667	49,848	57,698	56,771	62,795	-819	7,850	6,923	5,097
							(-1.6)	(15.7)	(13.9)	(8.8)

	Memorandum Items :
A.	Other Investments	15,041	19,411	33,084	26,022	40,095	4,370	13,673	6,611	7,011
B.	Credit-Deposit Ratio	58.6	55.1	53.5	51.2	49.4
C.	Non-food credit	55.9	53.1	51.0	49.4	46.7
	(excluding petroleum
	credit)/ Deposit ratio
D.	Incremental Credit-	90.4	34.0	45.8	3.3	6.9
	Deposit Ratio
E.	Cash Balances-Deposit Ratio	12.4	10.5	10.1	11.0	10.0
F.	Investment/Deposit Ratio	38.0	37.7	36.1	38.8	37.9
G.	Investment + Credit/
	Deposit Ratio	96.5	92.7	89.7	90.0	87.3

	@ 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)



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

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

I.	Gross Bank Credit (1+2)		2,31,860	2,58,991	3,00,283	2,53,245	2,95,373	27,131	41,292	-5,746	-4,910
	1.	Public Food Procurement
		Credit	9,791	7,597	12,485	10,075	16,828	-2,194	4,888	2,478	4,343
	2.	Non-Food Gross Bank	222,069	251,394	287,798	243,170	278,545	29,325	36,404	-8,224	-9,253
		Credit (A+B+C+D))						(100.0)	(100.0)	(100.0)	(100.0)
	A.	Priority Sectors	73,329	84,880	99,507	84,070	98,064	11,551	14,627	-810	-1,443
								(39.4)	(40.2)	(9.8)	(15.6)
	(i)	Agriculture	27,044	31,442	34,869	31,169	34,448	4,398	3,427	-273	-421
								(15.0)	(9.4)	(3.3)	(4.5)
	(ii)	Small Scale Industries	31,884	35,944	43,508	35,289	42,374	4,060	7,564	-655	-1,134
								(13.8)	(20.8)	(8.0)	(12.3)
	(iii)	Other Priority Sectors	14,401	17,494	21,130	17,612	21,242	3,093	3,636	118	112
								(10.5)	(10.0)	(-1.4)	(-1.2)
	B.	Industry (Medium &	93,053	1,02,604	1,17,530	99,492	1,12,172	9,551	14,926	-3,112	-5,358
		Large)						(32.6)	(41.0)	(37.8)	(57.9)
	C.	Wholesale Trade (Other	11,980	12,340	13,217	11,806	12,937	360	877	-534	-280
		than food procurement)					(1.2)	(2.4)	(6.5)	(3.0)
		of which:
	(i)	Cotton Corporation of India	381	294	305	32	83	-87	11	-262	-222
								(-0.3)	(0.0)	(3.2)	(2.4)
	(ii)	Jute Corporation of India	0	0	33	0	16	0	33	0	-17
								(0.0)	(0.1)	(0.0)	(0.2)
	(iii)	Other Trade	11,599	12,046	12,879	11,774	12,838	447	833	-272	-41
								(1.5)	(2.3)	(3.3)	(0.4)
	D.	Other Sectors	43,707	51,570	57,544	47,802	55,372	7,863	5,974	-3,768	-2,172
		of which :						(26.8)	(16.4)	(45.8)	(23.5)
	(i)	Housing	6,303	7,773	9,057	7,384	9,020	1,470	1,284	-389	-37
								(5.0)	(3.5)	(4.7)	(0.4)
	(ii)	Consumer durables	1,476	2,297	2,527	1,940	2,679	821	230	-357	152
								(2.8)	(0.6)	(4.3)	(-1.6)
	(iii)	Non-banking financial	3,386	5,154	6,227	5,600	5,375	1,768	1,073	446	-852
		companies						(6.0)	(2.9)	(-5.4)	(9.2)
	(iv)	Loans to individuals	1,933	2,066	1,904	1,662	2,603	133	-162	-404	699
								(0.5)	(-0.4)	(4.9)	(-7.6)
	(v)	Real Estate Loans	1,173	1,546	1,899	1,838	2,104	373	353	292	205
								(1.3)	(1.0)	(-3.6)	(-2.2)
	(vi)	Other non-priority sector	12,569	12,392	10,133	9,739	9,240	-177	-2,259	-2,653	-893
		personal loans						(-0.6)	(-6.2)	(32.3)	(9.7)
	(vii)	Advances against Fixed	N.A.	1,505	11,815	10,328	12,139	-	10,310	8,823	324
		Deposits
	(viii)	Tourism and tourism	N.A.	N.A.	822	0	423	-	-	-	-399
		related hotels
II.	Export Credit		29,590	30,008	33,947	28,307	31,671	418	3,939	-1,701	-2,276
	(included under item I.2)
III	Net Bank Credit		2,28,198	2,45,999	2,97,265	2,50,401	2,92,782	17,801	51,266	4,402	-4,483
	(including inter-bank participation)
	Memorandum Items:
	A.	Priority Sector Credit as %
		to NBC	32.1	34.5	33.5	33.6	33.5
	B.	Agricultural Sector Credit
		as % to NBC	11.9	12.8	11.7	12.4	11.8
	C.	Export Sector Credit as %
		to NBC	13.0	12.2	11.4	11.3	10.8

	* 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)

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

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

Industry (Total of Small, Medium			1,24,937	1,38,548	1,61,038	1,34,781	1,54,546		13,611	22,490	-3,767	-6,492
and Large Scale)
1.Coal			488	570	801	672	729		82	231	102	-72
2.Mining			N.A.	65	975	733	937		-	910	668	-38
3.Iron and Steel			8,482	11,668	15,767	12,148	15,405		3,186	4,099	480	-362
4.Other Metal and Metal Products			3,977	5,276	5,193	4,778	5,302		1,299	-83	-498	109
5.All Engineering			25,621	22,684	22,833	21,452	20,832		-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			2,703	3,506	4,652	3,468	5,129		803	1,146	-38	477
7.Cotton Textiles			7,592	8,053	9,331	7,914	9,363		461	1,278	-139	32
8.Jute Textiles			605	543	1,089	534	1,105		-62	546	-9	16
9.Other Textiles			7,802	9,685	10,651	9,492	9,927		1,883	966	-193	-724
10.Sugar			3,299	2,547	2,959	2,596	2,824		-752	412	49	-135
11. Tea			1,313	814	1,028	839	1,035		-499	214	25	7
12. Food Processing			3,103	3,655	4,134	3,698	4,326		552	479	43	192
13. Vegetable Oils (including			1,565	1,955	2,296	1,978	2,365		390	341	23	69
Vanaspati)
14. Tobacco and Tobacco Products			1,009	934	1,076	934	1,007		-75	142	0	-69
15. Paper and Paper Products			2,366	2,580	2,742	2,527	2,905		214	162	-53	163
16. Rubber and Rubber Products			1,748	1,817	2,534	1,792	2,277		69	717	-25	-257
17. Chemicals, Dyes, Paints, etc.			16,450	15,393	18,120	14,742	17,610		-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. Cement			1,744	1,918	2,502	1,945	2,655		174	584	27	153
19. Leather and Leather Products			2,279	2,225	2,478	2,166	2,547		-54	253	-59	69
20. Gems and Jewellery			2,785	3,096	3,530	3,068	3,422		311	434	-28	-108
21. Construction			1,854	2,494	2,646	2,659	2,326		640	152	165	-320
22. Petroleum			1,510	3,374	6,155	3,154	4,318		1,864	2,781	-220	-1,837
23. SAFAUNS $			2	0	0	0	0		-2	0	0	0
24. Automobiles including trucks			N.A.	N.A.	2,870	N.A.	2,827		-	-	-	-43
25. Computer software			N.A.	N.A.	616	N.A.	673		-	-	-	57
26. Infrastructure			N.A.	N.A.	3,163	N.A.	3,998		-	-	-	835
	of which :
	(i)	Power	N.A.	N.A.	(697)	N.A.	(982)		-	-	-	(285)
	(ii)	Telecommunications	N.A.	N.A.	(2,045)	N.A.	(2,442)		-	-	-	(397)
	(iii)	Roads and Ports	N.A.	N.A.	(421)	N.A.	(574)		-	-	-	(153)
27. Other Industries			26,640	33,696	30,897	31,492	28,702		7,056	-2,799	-2,204	-2,195
Memorandum Item :
Industrial Credit as proportion to
Net Bank Credit			54.7	56.3	54.2	53.8	52.8

	*	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.