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Overall financial conditions in the economy expected to improve, but cost of funds may rise: CII-IBA Survey

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The CII - IBA Financial Conditions Index registered an overall optimism value of 65.9 for the third quarter compared to 65.2 recorded in the previous quarter, indicating a marginal improvement.

Overall financial conditions in the economy expected to improve, but cost of funds may rise: CII-IBA Survey
Financial institutions expect a marginal improvement in the overall financial conditions in the economy, but largely expect the cost of funds to either stay the same or increase, a survey conducted by the Confederation of Indian Industry (CII) and Indian Banks Association (IBA) released on Wednesday said.
The CII - IBA Financial Conditions Index registered an overall optimism value of 65.9 for the third quarter compared to 65.2 recorded in the previous quarter, indicating a marginal improvement.
The overall improvement is due to a slight improvement from the previous quarter in External Financial Linkages and Funding Liquidity Index, with a significant improvement expected in the Economic Activity Index. While improvement is expected in most indices, the survey recorded a significant fall in respondents’ expectations in terms of Cost of Funds Index.
"The survey results indicate that there was improvement in all the factors vis-à-vis the previous quarter barring the Cost of Funds Index which has deteriorated significantly. The overall optimistic expectation is primarily due to the regulatory efforts put in by the government and RBI while striving towards normalcy post spread of COVID-19," the report said.
The results are based on a survey undertaken in the month of October 2020 across 30 entities. These include 8 public sector banks, 11 private sector banks, 4 foreign banks, 1 cooperative bank, and 6 NBFCs.
Among the sub-indices, the Funding Liquidity Index improved by 7.7 points, External Financial Linkages Index improved by 9.3 points and the Economic Activity Index improved significantly by 17.1 points, however, Cost of Funds Index deteriorated by 31 points. Cost of Funds index, which had impressive readings in the last two quarter survey, has signaled caution in Q3 reading.
Chandrajit Banerjee, director general, CII said, "It is a good sign that the forecasted trend of getting growth back is on track and the index reading indicates that there is optimism in the overall expectations. Considering the situation in the first quarter, wherein the economic activity had almost stalled due to the pandemic driven lockdown, the measures announced by MoF and RBI have started bearing fruits and the index is seeing a movement with upward bias."
He further added, "The fall in the cost of index value cannot be construed as negative, since the rate of interest is already at very low levels and with due policy support, we may see further fall in lending rates."
Sunil Mehta, chief executive, IBA further said, "Though the cost of funding index reading is at sub-optimum, it should not be construed as cost of funds are high for the customers. It only means that further reduction in interest rate which is already at a very low level, is possible, only with supportive signals from the regulators."
Among the sub-indices, the highest contribution was made by the Funding Liquidity Index which recorded a value of 78.8. It has improved significantly in comparison to the previous quarter. Within the Funding Liquidity Index, Issuance in Corporate Bond Market recorded the highest value of 93, followed by the Mobilization in Equity Market which registered a value of 85. The Liquidity Adjustment Facility was recorded at 58 while the mobilization from Money Market registered a value of 78.
The Cost of Funds Index recorded a value of 49.6, which is the lowest contributor for the third quarter. Within the Cost of Funds Index, the Marginal Cost of Funds based Lending Rate recorded the highest value of 62, followed by the Short Term Interest Rate which registered a value of 57. The Corporate Bond Spread between Top Rated 10 Year Corporate Bond & GoI Bond recorded a value of 42 and Long term interest rate retrieved the lowest value of 38. Overall, the Cost of Funds Index deteriorated by 31 points and has signalled caution in Q3 reading.
The External Financial Linkages Index has recorded a value of 68.8 which has improved significantly in comparison to the previous quarter. The Economic Activity Index recorded a value of 66.7 which has improved significantly in comparison to the previous quarter.
According to the survey, the value of economic activity index is supported by the values registered wherein the GDP growth has registered a value of 72, Non-food bank credit has registered a value of 73, Inflation has registered a value of 75 and asset prices have registered a value of 47.

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ONGC120.35 -4.65
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CompanyPriceChange%Loss
ONGC120.25 -4.85 -3.88
Coal India146.40 -5.75 -3.78
JSW Steel670.60 -25.75 -3.70
NTPC113.55 -3.85 -3.28
UPL808.00 -27.05 -3.24
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ONGC120.35 -4.65 -3.72
NTPC113.55 -3.70 -3.16
M&M784.85 -20.60 -2.56
Power Grid Corp233.00 -6.70 -2.80
Nestle17,678.30 -375.20 -2.08

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