Financial conditions index takes big knock in Q1 due to second wave

Despite drag reading on index holds out optimism: IBA-CII

Reading on the Financial Conditions Index took a big knock in the first quarter this year to 59.1 from 72.5 in the previous quarter (fourth quarter of FY21) due to the second Covid-19 wave and lockdown imposed to contain its spread. 

Sunil Mehta, chief executive, Indian Banks’ Association (IBA), said the first quarter of FY22 was challenging due to the impact of the second wave. But, the availability of vaccines and the enabling policy measures from the regulators and the government have helped to keep the index above the optimism level. Overall reading of the index at 59.1 indicates optimism among the participants.

According to a joint survey by the IBA and the Confederation of Indian Industry (CII), a reading above 50 indicates participants were largely optimistic. Any reading below 50 is seen as a sub-optimistic outlook and 50 signifies an optimistic approach.

All sub-indices, namely External Financial Linkages Index, Funding Liquidity Index, Economic Activity Index and Cost of Funds Index have moderated. The Funding Liquidity Index declined by 15.7 points, External Fina­ncial Linkages Index was down 20.5 points, the Economic Activity Index fell by 16.5 points, and Cost of Funds Index declined by 0.9 points. Chandrajit Banerjee, director gen­eral, CII, said the continuous struggle to cope with the spread of the second wave has been discouraging. But the good news is that there is still optimism in the expectation of banks and non-banking financial companies (NBFCs).

Since interest rates are already low and considerable pass through has taken place, further reduction in interest rates could be envisaged if the signal interest rate is further reduced. This is quite unlikely in the near term. The funding liquidity index in Q1 recorded a value of 66.7, showing a moderate decline over the previous quarter. The localised lockdowns in April 2021 led to lower short-term fund requirements by corporates, IBA & CII said in a statement. Both lobby groups jointly conducted the Financial Conditions Expectation Survey in April 2021, covering 30 banks and financial institutions.

According to the survey, 76.7 per cent respondents expect the non-food bank credit to increase while 10 per cent of the respondents expect it to decrease. The remaining 13.3 per cent of respondents expect no change in the current status. The overall credit growth continues to moderate due to risk aversion and continued parking of excess liquidity with the RBI. Acc­ordi­ng to RBI data, on a year-on-year (YoY) basis, non-food bank credit growth stood at 4.9 per cent in March 2021 compared to 6.7 per cent in March 2020. With the pandemic-ind­uced slowdown of the economy, expectations of a rise in non-food bank credit is low, the survey added.