The year 1991 marked a decisive changing point in Indias economic policy since Independence in 1947. Following the 1991 balance of payments crisis, structural reforms were initiated that fundamentally changed the prevailing economic policy in which the state was supposed to take the "commanding heights" of the economy. After decades of far reaching government involvement in the business world, known as the "mixed economy" approach, the private sector started to play a more prominent role. The enacted reforms not only affected the real sector of the economy, but the banking sector as well. Characteristics of banking in India before 1991 were a significant degree of state ownership and farreaching regulations concerning among others the allocation of credit and the setting of interest rates. The blueprint for banking sector reforms was the 1991 report of the Narasimham Committee. Reform steps taken since then include a deregulation of interest rates, an easing of directed credit rules under the priority sector lending arrangements, a reduction of statutory pre-emptions, and a lowering of entry barriers for both domestic and foreign players. The regulations in India are commonly characterized as "financial repression". The financial liberalization literature assumes that the removal of repressionist policies will allow the banking sector to better perform its functions of mobilizing savings and allocating capital what ultimately results in higher growth rates. If India wants to achieve its ambitious growth targets of 7-8% per year as lined out in the Common Minimum Programme of the current government, a successful management of the systemic changes in the banking sector is a necessary precondition.
Liberalization of Indian Banking sector post 1991 led to a shift in banking culture from Class banking to Mass banking. This sector was and will continue to be the backbone of Indian economy. According to RBI, Indian banking industry is now well-regulated and adequately capitalized compared to banks across other developed countries. This has helped them in remaining resilient in the wake of global meltdown and sub-prime crisis. Increasing presence of foreign banks, heightened competition and rapid technological advancement forced banks to become cost efficient and financially strong. Taking risks is part of a banks core business. They borrow money in the form of deposits and leverage it to lend it to borrowers at a higher rate. Banks therefore need to be highly regulated as even a small liquidity problem can create panic amongst depositors", further deteriorating liquidity. Since accepting deposits and providing loans and credit is primary business of a bank, some loans are bound to go bad. Making provisions for such losses on bad debts is therefore important to maintain liquidity. They also carry huge liabilities in the form of customer deposits. The best parameter used to judge a bank is the level of Non-Performing Assets it is carrying on its balance sheet. These are loans that do not pay off their principle amount or interest for at least 90 days. Due to its peculiar nature of business, cash flow statements of banks do not provide much insight into their performance.
Five important factors that investors should judge before investing in a bank are capital adequacy, credit quality, liquidity position, earnings and capital efficiency. Recent sub-prime crisis has highlighted the importance of banks" credit quality. Banks usually pay-out dividends and are high yielding stocks. Performance of banking stocks on stock markets is directly impacted by overall economy"s health and changes in interest rates announced by RBI. This is reflected on Bankex, the index for banking stocks. Indian banks are still recovering from the last year"s sub-prime effect and experts believe that several banks are still trading at a much lower price-to-earning ratio compared to the overall market. While public sector banks are shedding their excess flab by pruning manpower and NPAs, private banks are seen consolidating though mergers and acquisitions. Government"s effort to encourage public sector banks to keep lending during the slowdown is expected to show positive results as soon as the economy shows positive signs. Private Banks played smart by shifting their focus from corporate lending to retail lending to cap their losses.
Besides, indications from RBI that it does not plan to increase interest rates any time soon also helped improve investor sentiments about banking stocks. Experts believe that credit off-take will increase around 18% to 22% during the remaining part of this year driven by soaring demand from corporate sector.
RECENT TRENDS IN INDIAN BANKING SECTOR
The stalwarts of India's financial community nodded their heads sagaciously when Prime Minister Manmohan Singh said in a speech: "If there is one aspect in which we can confidentially assert that India is ahead of China, it is in the robustness and soundness of our banking system." Indian banks have been rated higher than Chinese banks by international rating agency Standard & Poor's. With the credibility of the Indian banking system on a high, a number of Indian banks are now leveraging it to expand overseas. State Bank of India, the country's largest bank has acquired 76 per cent stake in a Kenyan bank, Giro Commercial Bank, for US$ 7 million. Canara Bank is helping Chinese banks recover their huge non-performing assets (NPA).
To meet the challenges of going global, the Indian banking sector is implementing internationally followed prudential accounting norms for classification of assets, income recognition and loan loss provisioning. The scope of disclosure and transparency has also been raised in accordance with international practices. India has complied with almost all the Core Principles of Effective Banking Supervision of the Basel Committee. Some Indian banks are also presenting their accounts as per the U.S. GAAP. The roadmap for adoption of Basel II is under formulation. The use of technology has placed Indian banks at par with their global peers. It has also changed the way banking is done in India. 'Anywhere banking' and 'Anytime banking' have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows.
Trends
The Indian banking industry is currently in a transition phase. On the one hand, the public sector banks, which are the mainstay of the Indian banking system, are in the process of consolidating their position by capitalising on the strength of their huge networks and customer bases. On the other, the private sector banks are venturing into a whole new game of mergers and acquisitions to expand their bases. The system is slowly moving from a regime of "large number of small banks" to "small number of large banks." The new era will be one of consolidation around identified core competencies.
In India, one of the largest financial institutions, ICICI, took the lead towards universal banking with its reverse merger with ICICI Bank a couple of years ago. Another mega financial institution, IDBI, has also adopted the same strategy and has already transformed itself into a universal bank. This trend may lead to promoting the concept of a financial super market chain, making available all types of credit and non-fund facilities under one roof or specialised subsidiaries under one umbrella organisation.
Growth statistics
Scheduled Commercial Banks (SCBs) in India are categorised into five different groups according to their ownership and / or nature of operation. These bank groups are (i) State Bank of India and its associates (ii) other nationalised banks (iii) regional rural banks(iv) foreign banks and (v) other Indian SCBs (in the private sector). The banking sector witnessed strong growth in deposits and advances during the year 2009-10. As of March 2010, the number of commercial banks stood at 170. The aggregate deposits of SCBs increased from Rs 3834110 crores in March 2010; aggregate credit deployed stood at Rs 2775549 crores; and investments stood at Rs 1166479 crores. Net domestic credit in the banking system has witnessed a steady increase of 17.5 per cent. The growth in net domestic credit during the current financial year, 2009 was 18.4 per cent.
Nationalised banks were the largest contributors to total bank credit at 42.8 per cent. While foreign banks' contribution to total bank credit was low at 6.7 per cent, the contribution of State Bank of India and its associates accounted for 23.8 per cent of the total bank credit. Credit extended by other SCBs stood at 18.9 per cent.
Banks and consumer finance
Indian banks, particularly private banks, are riding high on the retail business. ICICI Bank and HDFC Bank have witnessed over 30 per cent year-on-year growth in retail loan assets in the second quarter of 2009-10. Annual revenues in the domestic retail banking market are expected to increase to US$ 20 billion by 2012 from about US$
Since 1990's, there has been spectacular growth of the Indian banking sector. Several variables like total asset, total deposit, total credit and net profit has been analyzed to study the relative progress of the Indian banking sector. In terms of asset, all bank groups have recorded higher asset growth after the financial reforms. It can be seen (Table-1) that, during financial reforms the total asset of the Indian banking sector recorded higher growth and since 1999 total asset of the banking sector has grown significantly. During 1999, the total commercial bank asset was Rs. 6531.37 billion, which increased to Rs. 17854.76 billion in 2007. Total deposits of the commercial banks have gone up significantly since 1999 (Table - 2). All bank groups recorded higher deposit especially after 1999. Total deposit of all banks increased to Rs. 13907.54 billion in 2007, which was Rs. 5283.27 billion in 1999.
Since 1990's, there has been spectacular growth of the Indian banking sector. Several variables like total asset, total deposit, total credit and net profit has been analyzed to study the relative progress of the Indian banking sector. In terms of asset, all bank groups have recorded higher asset growth after the financial reforms. It can be seen (Table-1) that, during financial reforms the total asset of the Indian banking sector recorded higher growth and since 1999 total asset of the banking sector has grown significantly.
During 1999, the total commercial bank asset was Rs. 6531.37 billion, which increased to Rs. 17854.76 billion in 2007. The total advances of all commercial banks have gone up significantly over last five years (Table - 3). Since 2003, the total advances of all commercial banks have been more than double. In 2003 total advances were Rs. 4344.56 billion and increased to Rs. 10147.76 billion.
The asset quality reflects the structural soundness of the banking sector. The ratio of contingent liability shows, the foreign banks are more exposed to default, which implies the foreign banks provide most sophisticated services. It is because most of the foreign banks are concentrated in urban areas and mostly carter to large clients. The contingent liability to asset ratio of the total commercial banks shows, it has declined from 25 percent in 1980 to 16 percent in 2007 (Table - 6). The foreign banks and the private banks are exposed to more losses in case of default and the public sector banks are less exposed to default.
Profitability can be measured with two indicators; Return on Asset (ROA) and the Return on Equity (ROE). The return on asset is defined as the ratio of net profit to average asset. It can be seen (Table -7) that, after financial reforms the banks are more profitable. The foreign banks are more profitable than the domestic private banks and the public sector banks. After financial liberalization, the private and the foreign banks recorded higher rate of return on asset. During the early phase of reforms, the return on asset was negative. But after that it increased from -0.89 percent in 1994 to 1 percent in 2007.
Return on equity can be taken as proxy to measure profitability. The private banks are more consistent since 1990's in terms of the return on equity, where as the foreign banks have been the most inconsistent. During early 1990's the return on equity of the foreign banks was about 132 percent and in 2007 it is about 16 percent (Table - 8). The public sector banks are performing better with 16.14 percent return on equity.
OBJECTIVE
The study aims at understanding the impact of various macro economic parameters that affects the credit deployment by the banks. This study will help us to know the emerging trends in credit deployment by banks and how macro factors affect it.
DATA AND METHODOLOGY
Data Collection
Data collected is primarily secondary data, compiled from Reserve Bank of India's website. Data collection includes the net credit deployed by all the scheduled commercial banks from 1992-2009. For macro economic factors data was collected for GDP growth rate, Inflation, IIP, Bank Rate, SLR and CRR for the same period.
Methodology
Net Credit is taken for all the scheduled commercial banks. Net credit deployed by banks is the total advances given to the various sectors. The growth of credit is captured through the variable, GDP and IIP.
Another macro factor that affects the credit deployment by banks is Inflation. Other variables for the study are Bank Rate, SLR and CRR.
In this we will take dependent variable as Net Credit deployed by bank and rest all the variables as independent variables, i.e.; GDP, IIP, Inflation, CRR, SLR, Bank Rate. Also we have to standardize the data by calculating mean and standard deviation.
Thus, the regression model proposed for the analysis is: NC = c + b1(GDP) + b2(Inflation) + b3(IIP) + b4(BR) + b5(SLR) + b6(CRR) Where, c is a constant, b1…b6 are standardized coefficients NC = Net Credit deployed by the bank GDP = Gross Domestic Growth Rate Inflation = Inflation (WPI) IIP = Index Industrial Production BR= Bank rate SLR= Statutory Liquidity Ratio CRR= Cash Reserve Ratio
It has been observed in the regression that more the GDP is growing more is the bank credit formation. As the coefficient for interest earned is +31. Similarly, Bank Rate is negatively affecting bank credit as it have negative coefficients; the constant term in the regression takes the effect of all other variables which have not been taken for regression due to data availability or measurement constraints. Overall regression models explain the 93.09 % of the variance of independent variables which is bank credit.
0.93 which shows that there is high correlation between the observed and predicted values of the dependent variable i.e. Bank credit to SMEs. The R value indicates the extent of relationship between dependent variable & the independent variables. The value of R Square indicates the proportion of variation in the dependent variable explained by the regression model. In this case it is at 0.86 which indicates that 86.3% of variation is been explained by the regression model i.e. the independent variables in totality. Thus the model is being well explained by the variables taken into account. A high value of 0.93 indicates that how well the model is fitting the population.
CONCLUSION
In this we found out the link between bank lending and macroeconomic uncertainty using data of all scheduled commercial banks in India. We hypothesized that banks' lending will be affected by macroeconomic uncertainty and would be heterogeneous, with some banks reacting more strongly than others. We claim that in the presence of greater macroeconomic uncertainty, banks collectively become more conservative, and this concerted action will lead to a narrowing of the credit. To test this hypothesis, we estimate a simple reduced-form equation using annual data from 1992-2009. Our results strongly support our hypothesis that micro factors and monetary policy affects the credit deployed by the bank. Therefore, as far as GDP growth rate and IIP increases, credit deployment bank will increase provided key monetary rates remain stable or decreases.
