CII-IBA Financial Conditions Index declines

Mumbai: The CII-IBA Financial Conditions Index for Q1 FY 2021-22 has declined to 59.1 points from 72.5 in the previous quarter, owing to deterioration in the overall financial conditions in the economy. All sub-indices namely External Financial Linkages Index, Funding Liquidity Index, Economic Activity Index and Cost of Funds Index have moderated. However, the overall index still depicts optimism on the Financial Conditions.

Chandrajit Banerjee, Director General, CII said, "The overall decline of the Financial ConditionsIndex can be attributed to the second wave of the pandemic, which halted the economicrecovery India had staged after the first wave. The continuous struggle to copewith the spread of the second wave of the novel coronavirus has beendiscouraging and has impacted both human life and economy adversely, but thegood news is that there is still optimism in the expectation of the Banks andNBFCs. This is probably due to the availability of vaccine during this time and the

measures announced by the Government to support the economy in last fewmonths which has enabled to keep the mood optimistic."

Sunil Mehta, chief executive, IBA, said: "Overall reading of the index at 59.1 indicates optimismamong the participants. Though the first quarter of FY 22 is indeed challenging due to the impactof second wave, the availability of vaccine and the enabling policy measures from the regulatorsand government have helped to keep the index above the optimism level. Since interest rates arebenign over the last couple of years and banks have already passed on the benefits to customers,cost of fund reading saw only marginal decrease as compared to previous quarter. As of now, the liquidity position is comfortable and RBI is ensuring the same through several innovative ethods. So, banks are in a position to lend to all needy segments of the economy to support economic activity and growth. Since we are seeing reduced infections and aggressive vaccination drive from all authorities, things are expected to improve in the coming quarters." This figure is based on Round 23 of the Financial Conditions Expectation Surveyundertaken in the month of April 2021, wherein a total of 30 entities participated in theSurvey which includes 9 Public Sector Banks, 11 Private Sector Banks, 03 ForeignBanks, and 01 Cooperative Bank. Representing other financial institutions, 06 leadingNBFCs participated in the Survey. Among the sub-indices, the Funding Liquidity Index declined by 15.7 points, ExternalFinancial Linkages Index declined by 20.5 points, the Economic Activity Index hasdeclined by 16.5 points, and Cost of Funds Index declined by 0.9 points. The decline isprimarily due to the spread of the second wave of the corona virus and subsequentlockdowns imposed on Indian states hampering the overall growth of the economy.

On comparing Q to Q (Q4FY2020-21 vs Q1FY2021-22), respondents are fairly optimisticabout liquidity, external linkages and Economic activity, despite the spread of ongoingpandemic,though the readings are not better than Q4 readings due the risks fromsecond wave. Optimism is largely stemming from the various support measuresannounced by the Government and RBIover the last one year and also due to thefocused efforts on inoculation.