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COVID19 Impacts CII-IBA Financial Conditions Index
May 16, 2020

The CII - IBA Financial Conditions Index for Q1 FY 2020-21 recorded a steep drop to below 50 mark for the first time in the past few quarters owing to the 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, respondents are quite optimistic with respect to the availability of funds at a lower cost.

This fall is primarily due to the outbreak of the COVID-19 pandemic which has sent economies and financial sector across the world into a meltdown. With a series of lockdowns happening across the world bringing economic activities to a virtual halt, organizations in the global arena are uncertain about the whereabouts of their cash flows and business prospects. India is not an exception.

A total of 22 entities participated in the Survey which includes 09 Public Sector Banks, 05 Private Sector Banks, 02 Foreign Banks, and 01 Cooperative Bank. Representing other financial institutions, 05 leading NBFCs participated in the Survey.

Releasing the index for the first quarter of 2020-21, Mr Chandrajit Banerjee, Director General, CII said “The impact of COVID-19 has been much worse than the financial crisis faced by the world including India in 2008. While the lockdown was necessary to mitigate the impact of coronavirus on the population, it has had dire implications on the Financial Conditions of the economy. In this hour of need, Banks along with NBFCs and MFIs have the ability to ensure smooth and continuous flow of credit, particularly to MSMEs (micro, small and medium enterprises), farm sector and retail sector and ensure some economic activity. The measures announced by the Government and RBI, have come as a big relief to them and with an expected upliftment of the lockdown soon, the financial conditions can only improve”.

On the first quarter of CII-IBA Financial Condition Index, Mr Sunil Mehta, Chief Executive, IBA stated that  “Low reading of the overall index for the Q1, FY 2020-21 is on the expected lines. Corona virus has created havoc across the world and India is not an exception. Preventive measures like lockdown would have adverse effect on the economy. In the present round of the survey, the cost of fund index is reading at 83.5 which is the highest in the sub-indices which essentially conveys that interest rates have come down substantially to facilitate business. Even the liquidity is also comfortable. Banks are playing a significant role even during this pandemic, banking services are being offered to the general public without any disruption. Going forward, the gradual lifting of the lockdown would help the economy to rebound at a faster pace and would help the businesses and there by employment.”

Among the sub-indices, the highest contribution was made by the Cost of Funds Index recording a value of 83.5, which has improved significantly in comparison to the previous quarter. Within the Cost of Funds Index , Short term interest rate and the Marginal Cost of Funds based Lending Rate recorded the highest value of 95, followed by the Long Term Interest Rate which registered a value of 91. The Corporate Bond Spread between Top Rated 10 Year Corporate Bond & GoI Bond retrieved the lowest value of 52.The regulator had appropriately stepped in with monetary measures to bring in lower interest rate regime to provide relief for the economy.

The Funding Liquidity Index recorded a value of 47.2, which has decreased significantly in comparison to the previous quarter. Within the Funding Liquidity Index, Issuance in Corporate Bond Market recorded the highest value of 70, followed by the Liquidity Adjustment Facility which registered a value of 52. The mobilization in Money Market was recorded at 50 while the Mobilization from Equity Market registered a value of 16.The low expectation is primarily due to the havoc created by the Pandemic wherein majority of the businesses in India were locked down.

The External Financial Linkages Index has recorded an all time low of 20.5 which is significantly lower in comparison to the previous quarter. The value registered is largely due pessimistic expectation of increase in Foreign Exchange Reserve, Nominal Exchange Rate, Mobilization through ADRs, GDRs, ECBs & FCCBs and Net Capital Inflows – FIIs. The low expectation is not a surprise given the state of the Global Economy due to the spread of COVID-19 leading to economic shutdowns in majority of the countries.

The Economic Activity Index recorded a value of 25.6 which has declined significantly in comparison to the previous quarter. According to the survey, the value of economic activity index is supported by the decline in the GDP, Non-food Bank Credit and Asset Price movement due to the spread of COVID-19.

The CII - IBA Financial Conditions Index was launched in April 2015 to (i) Serve as a key indicator in assessing the short-term financial conditions in the Indian economy, (ii) Provide effective monitoring of current financial conditions for facilitating regulatory and policy decisions, (iii) Provide early signals on turning points in financial conditions, and (iv) Help tracking credit flow conditions for industry & service sectors from various channels.

16 May 2020
New Delhi

 

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