The CII-IBA Financial Conditions Index (FCI) for Q1 (April-June) FY 2020-21 recorded a steep drop to below 50 for the first time in the past few quarters. The FCI in the reporting quarter was 44.2 against 60.5 in the preceding quarter.

The Confederation of Indian Industry (CII) and the Indian Banks’ Association (IBA), in a joint statement, said the steep fall in the index is due to expectation of deterioration in the overall financial conditions in the economy on account of worsening funding liquidity, external financial linkages and economic activity index.

However, the 22 respondents (nine public sector banks, five private sector banks and non-banking finance companies, each, two foreign banks and one urban co-operative bank) are quite optimistic with respect to the availability of funds at a lower cost.

Funding liquidity index

The Funding Liquidity Index declined to 47.2 (from 74 in the preceding quarter) primarily due to the lockdown in the Indian economy.

The value depicts pessimism in the expectation of the respondents, the statement said and added that it is an indication of the likely liquidity position in the market. “Considering the severity of the (Covid-19) situation, it is essential to keep the monetary channel in surplus liquidity mode.

“Once the lockdown is lifted (already the government has given relaxations in green and orange areas), the need for working capital will increase which would help in increase in the issuance of Commercial Papers and Certificate of Deposits,” the statement said.

According to the joint survey, issuance in the corporate bonds in the current quarter will depend largely on the evolving situation of containing the pandemic and how optimally we manage the lifting of the lockdown.

External financial linkages

The External Financial Linkages Index (EFLI) saw the sharpest fall among the four sub-indices comprising the FCI. The EFLI plunged to 20.5 in the reporting quarter from 59.6.

The survey said the low expectation on EFLI is not a surprise given the state of the global economy due to the spread of Covid-19, leading to economic shutdown in majority of the countries.

Economic activity index

The economic activity index registered a value of 25.6 (55.8) showing a significant decline in the reading indicating the pessimism in the expectation of the respondents. The survey observed that the value of economic activity index is on account of the decline in the GDP, non-food bank credit and asset price movement due to the spread of Covid-19.

“Since the lockdown is further extended, the demand for bank loans will remain subdued during April-May, 2020. However, once the economic activity picks up, the pent up demand for bank credit is quite likely to increase. Considering the present scenario, Q1 is quite likely to see muted credit growth,” the statement said.

Cost of funds index

The Cost of Funds Index was recorded at 83.5 in Q1 of FY 2020-21 (52.4), showing optimism among the participants on reduction in the cost of funds.

“Since the liquidity is in surplus mode, (interest) rates are benign, RBI’s liquidity injection measures have helped to improve the situation. Due to lockdown, raising resources through this route is also lower.

“Presently, market is increasingly turning risk-averse and increased Centre borrowing could drive up the cost of funds for cash-starved States,” the statement said.

Also, both marginal cost of funds based lending rate and external benchmark lending rate are showing a downward trend.

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