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> Policies> economic survey 2000-01
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Economic Survey 2000-2001
[Review of Developments]
Money supply
Financial developments
Capital and money markets
1.65 The year-on-year growth of broad money supply (M3) was 15.8 per cent as on January 12, 2001 as against 16.7 per cent as on January 14, 2000. This reflected expansion in monetary base through the India Millennium Deposits in November 2000. Driven by the increase in the net foreign exchange assets of the RBI, reserve money increased by 5.1 per cent till January 12 in current financial year compared with negligible growth in the corresponding period of the previous year. The year-on-year growth in deposits of scheduled commercial banks (SCBs) as on January 12, 2001 at 17.9 per cent was above the RBI’s projected growth rate of 15.5 per cent. However, this reflected the inclusion of Rs. 25,662 crore from the India Millennium Deposits (IMD) Scheme in time deposits of banks, which grew at 15.7 per cent till January 12 in the current financial year compared to 13 per cent in the corresponding period of the previous year. Currency with the public expanded at a lower pace of 10.0 per cent till January 12, 2001 as against 14.9 per cent in the corresponding period of 1999-2000.
Financial developments
1.66 The important monetary measures undertaken in the current financial year relate to transition to a full-fledged Liquidity Adjustment Facility, increase in the permissible level of commercial banks’ exposure to the capital market, improvements in credit delivery system with special focus on the small scale industry, and renewed efforts aimed at speedier recovery of funds locked up in the non-performing assets of commercial banks. The impact of banking sector reforms on asset quality is discernible from the remarkable reduction in the ratio of incremental NPAs to the incremental total loan assets of SCBs from 16.9 per cent in 1998-99 to 2.8 per cent in 1999-2000. As per the revised guidelines for NPA recovery in respect of NPAs with outstanding balances of upto Rs. 5 crore, the public sector banks could recover about Rs. 546 crore till the end of December, 2000.
1.67 In order to enable financially sound banks to play a greater role in resource mobilisation for investment and growth, they have been permitted to enter the insurance business with prior approval of RBI. Similarly, well-managed non-banking financial companies (NBFCs) have also been allowed to enter insurance business with prior approval of RBI. Other measures include, revised norms for entry of new banks in the private sector, reduction in the minimum maturity of Certificates of Deposits from 3 months to 15 days, issuance of final guidelines on Commercial Papers imparting greater flexibility to corporates, especially those in the service sector in resource mobilisation, mandatory rating for term deposits accepted by AIFIs, and move towards consolidated supervision of banks and their subsidiaries by incorporating the balance sheets of subsidiaries in the balance sheet of the parent bank.
1.68 Till January 12, 2001, non-food credit from SCBs registered a growth of 11.9 per cent as against 10.5 per cent last year. There has been growing concern over the deceleration in industrial production despite higher flow of non-food credit. The acceleration in credit flow is not however due to an increase in credit to the oil sector. The credit flow to the petroleum sector till January 12, 2001 in the current financial year declined by Rs. 79 crore compared with an increase of Rs. 210 crore in the corresponding period of the previous year.
1.69 There was significant improvement in sanctions made by the All India Financial Institutions (AIFIs). The sanctions made by the AIFIs increased by 17.5 per cent in April-December 2000 compared with 5.0 per cent in April-December 1999. Disbursements made by the AIFIs increased by 12.4 per cent in the same period of the current year compared with 19.0 per cent last year.
1.70 A number of policy measures have been taken to improve the financial health and operational efficiency of commercial banks in India. The major policy measures include, legislative initiative to reduce the minimum Government shareholding in nationalised banks to 33 per cent, annoucement of revised norms for entry of new banks in the private sector, move towards consolidated supervision by incorporating the balance sheets of subsidiaries into the balance sheet of the parent bank, in-house arrangements by banks for collecting and collating credit and other related information required by the proposed Credit Information Bureau, close monitoring of suit-filed and decreed accounts on an on-going basis and a simplified, non-discretionary and non-discriminatory mechanism for recovery of non-performing assets (NPAs). In addition to these measures, a few notable initiatives aimed at enhancing opportunities for the relatively stronger banks in financial intermediation relating to entry into insurance business and increase in the permissible level of exposure to capital markets.
1.71 The year 1999-2000 witnessed significant decline in non-performing loans. For SCBs as a whole, gross non-performing loans declined from 14.7 per cent of gross advances at the end of March 1999 to 12.8 per cent at the end of March 2000. The corresponding decline in respect of public sector banks was from 15.9 per cent to 14.0 per cent whereas for private sector banks, it was from 10.8 per cent to 8.5 per cent. In the case of foreign banks, the corresponding decline was less than 1 percentage point from 7.6 per cent to 7.0 per cent. The decline in the percentage of net non-performing loans to net advances was less significant. For SCBs as a whole, net non-performing loans declined from 7.6 per cent of net advances as on March 31, 1999 to 6.8 per cent as on March 31, 2000. In the case of public sector banks, the corresponding decline was from 8.1 per cent as on March 31, 1999 to 7.4 per cent as on March 31, 2000, whereas in the case of private sector banks, it was from 7.4 per cent to 5.6 per cent. Net non-performing loans of foreign banks declined from 2.9 per cent to 2.4 per cent during the same period.
1.72 It is also meaningful to look at the magnitude of non-performing assets (NPAs) in relation to total assets. For SCBs as a whole, NPAs accounted for 5.5 per cent and 2.7 per cent of total assets in gross and net terms respectively. The corresponding figures in respect of public sector banks were 6.0 per cent and 2.9 per cent compared with 3.6 per cent and 2.3 per cent for private sector banks. It is mentionable that in the case of old private sector banks, these figures were higher at 5.1 per cent and 3.2 per cent in gross and net terms respectively as against much lower figures of 1.6 per cent and 1.1 per cent in the case of new private sector banks. In the case of foreign banks, the figure for gross NPAs was rather high at 3.2 per cent as against only 1.0 per cent in case of net NPAs.
Capital and money markets
1.73 The capital market witnessed subdued activity in the current financial year. During April-December 2000 resource mobilisation through public and rights issues was about 26 per cent lower than the amount raised in the corresponding period of the previous year. Though the amount raised through debt registered greater decline by about 32 per cent the amount raised through equity issues also declined by around 22 per cent during this period. This mirrored the relatively weaker investor sentiment in the secondary market, which was also reflected in the net FII investment. Net FII investment (as per estimates by the SEBI) in April-December 2000 constituted hardly one-third of that in the corresponding period of 1999.
1.74 Contrary to the buoyant conditions witnessed in the stock market in 1999-2000, there has been significant decline in share prices in the current financial year. The Bombay Stock Exchange (BSE) Sensitive Index declined by 13.5 per cent from 5001 at the close of March 2000 to 4327 at the close of January 2001. The National Stock Exchange (NSE) Index (S&P CNX Nifty) also exhibited similar trends in share prices. It declined by 10.2 per cent from 1528 to 1372 during the same period. This erosion in share prices reflected the influence of share price movements abroad, specially at the tech-heavy NASDAQ. Nevertheless, the decline at BSE and NSE was much less than that at NASDAQ where the index declined by 39.4 per cent from 4573 at the close of March 2000 to 2773 at it close of January 2001.
1.75 The Securities and Exchange Board of India (SEBI) has carried further the process of capital market reforms with the objective of moving towards a market, which is modern in terms of infrastructure as well as international best practices, investor friendly, efficient, safe and globally competitive. The major reforms undertaken in the capital market in course of the year include the following:
Tightening of entry norms for IPOs through modifications of SEBI (Disclosure and Investor Protection) Guidelines,
Relaxation of IPO norms for companies in all sectors by reducing the minimum level of public offering from 25 per cent to 10 per cent of post-equity issue,
Compulsory book building in respect of IPOs by companies without proper track record, including the stipulation that 60 per cent of the offer be allotted to qualified institutional buyers,
Permission for 100 per cent one-stage book building with bidding centres at all cities with stock exchanges and liberalisation of investment norms for mutual funds by allowing open-ended schemes to invest up to 10 per cent of their net asset value (NAV) in equity shares or in equity-related instruments of unlisted companies,
Relaxation of permissible level of funds of commercial banks for investment in capital market by replacing the earlier ceiling of 5 per cent of previous year’s incremental deposits by 5 per cent of outstanding credit and
Setting up of Investor Grievance Redressal Cell in Department of Economic Affairs to coordinate the efforts of regulatory agencies, viz., RBI, SEBI and the Department of Company Affairs.
Introduction of derivatives trading based on stock index futures.
1.76 An important measure designed to further enhance the efficiency of the money market taken in June this year was related to the transition to a full-fledged Liquidity Adjustment Facility (LAF) involving injection and absorption of liquidity via variable rate reverse repo auctions and variable rate repo auctions respectively. Regulatory powers have been given to RBI under amendment to the Securities Contracts (Regulation) Act, 1956 to regulate dealings in Government and money market securities. The measures for further deepening and widening the Government securities market included permission to entities, who have been allotted securities in primary auctions, to sell them on the allotment date itself, and permission to all entities having SGL and current account with RBI Mumbai office to undertake repos in Treasury Bills and Central/State Government dated securities.
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