I Term Lendings for Industry

A

Despite the professed diversification taking place, households have continued to use bank deposits as a major preferred avenue for financial savings. Banks have begun to offer higher rates of interest for longer maturities and the government, following pressures from banks, has also extended fiscal concessions for long maturity deposits. Term deposits with maturities of 3 years and over remained at near 40 per cent in terms of accounts and 24.4 per cent in terms of amount at the end of March 2006. There are reports that banks are now vying with each other to attract long-term deposits from the public, also in competition to postal savings. The year-on-year increase in time deposits of scheduled commercial banks at the end of May 2007 by 24.1 per cent on top of an 18.4 per cent rise in the preceding year has been phenomenal. Concurrently, there has been a Rs 20,000 crore absolute fall in small saving receipts during April-February (2006-07) over the corresponding period of the previous year.

More radical changes are occurring in the distribution of bank loans as between medium-term and long-term loans, on the one hand, and cash credit, overdrafts and various other forms of short-duration loans, on the other. It is found that the share of term loans in aggregate loans outstanding for Rs 2 lakh and above accounts has shot up from 30.2 per cent at the end of March 2000 to 58.9 per cent at the end of March 2006. On the face of it, this may appear that the banks have found an answer to the vacuum created by the absence of development finance institutions (DFIs). The reality is quite different. This shift does not appear to be due to the banks embracing project finance as a major activity. This is partly evident from the fact that the changes in the distribution of total term-loans (medium-term and long-term

Table 1: Distribution of Term Loans* by Major Industries

(Rupees crore)

Notes: * Term loans include medium-term loans + long-term loans.

Source: RBI, Banking Statistics: Basic Statistical Returns of Scheduled Commercial Banks in India, March 2006 (Vol 35) and earlier issues.

Table 2: Share of Term Loans in Total Sectoral Advances

Year (A) As Percentage of Total Sectoral (B) As Percentage of Total Sectoral (March-Advances Including Small Loan Accounts Advances Excluding Small Loan Accounts End) Agri-Industry Personal Others Total Agri-Industry Personal Others Total

culture Loans Term culture Loans Term Loans Loans

Notes: (i) Figures in brackets are percentage increases between March 2000 and March 2006 (6 Years) in the respective total sectoral advances.

(ii) Term loans are excluding those of small loan accounts for both the sections A and B.

(iii) Small Loans Accounts include accounts with credit limit of Rs 2 lakh and less. Source: As in Table 1.

Economic and Political Weekly June 23, 2007

Graph A: Trends in WeightedGraph B: Spot Quotations for US Dollarsome sectors. But, for “industry”, on theAverages of Call Rates, Repo Rates,in the Domestic Inter-Bank Market

reasonably safe assumption that its credit

Borrowing – May 2007 accounts are generally of Rs 2 lakh and

50.0

12

25.5

il il i (Daily Working Days May 2007) Monthly Averages (Jan 2001 to April 2007)

10

advances have risen from about 25 per cent

Weighted Average (Per Cent)

(Rupees Thousand Crore)Rupees per US dollar

in March 2000 to 51 per cent in March

2006.

Again, it may appear that the industry

is using more of project finance. But in

reality what seems to have happened is that

44.0

the corporate sector has achieved a series

of measures of financial engineering which

42.0

have drastically brought down its working

capital requirements and which have hence

shown a statistical increase in its tradi

-i

Call Money Volume (Rs Cr)

Repo Rates – Outside the RBI

tional dependence on the banking industry

together) amongst major sectors have period when the increase in aggregate bank become more skewed. It is the share of credit for industry has been the lowest at “personal loans (housing and others)” in around about 18 per cent in the six-year total term credit that has shot up from 12.1 period mentioned above while the sharpest per cent to 31.1 per cent during the past rise of 38 to 55 per cent has occurred in six years referred to above (Table 1). On the category of “personal loans” (Table 2). the other hand, the relative shares of all However, there is another side to the other sectors in total term credit for ac-story that is discernible; this concerns the counts of Rs 2 lakh and above have de-proportions of term loans in total sectoral clined, with the steepest decline noticed loans. Due to non-availability of data on under “industry” from 48.2 per cent to 38.7 the distribution of term loans for small per cent of total term credit. Interestingly, loan accounts below Rs 2 lakh, these this decline in the share of “industry” in proportions may have problems in intertotal term loans has occurred during a sectoral and inter-year comparisons for

Table 3: Selected Financial Ratios of Public Limited Companies

Source: RBI Bulletins.

for term loans. First, the inventory to sales ratio has come down from about 19 per cent to 14.8 per cent. Second, the corporate sector has passed on the bulk of its burden of credit requirements to other supplier units, which is reflected in a rapid rise in the ratio of sundry creditors to net working capital, from 178 per cent in 2000-01 to 300 per cent in 2004-05 or more in the previous year (Table 3). Finally, there are reports of corporates using the bond market for working capital purposes so as to reduce the interest burden. Such bonds raised from the market have steadily risen from Rs 66,948 crore in 2002-03 to Rs 96,369 crore in 2005-06 or to Rs 103,169 crore in 2006-07 (April-December). Banks’ outstanding contributions to these bonds have ranged from Rs 56,000 crore to Rs 80,000 during the past six-year period. As a result of all these, corporates’ interest cost as percentage of gross profit has drastically come down from 63 per cent in 2000-01 to 22 per cent in 2004-05. Overall, there is no conclusive evidence that either the bond market or the commercial banks have

Table 4: Money Market Operations (RBI’s Daily Data)

* Data for reporting Fridays are given within brackets and they are also included in the weekly range/daily averages. $$ No of reporting/traded days is fewer than given above. $ Thursday data.

Economic and Political Weekly June 23, 2007

Graph C: Annualised Forward Premia in Graph D: Yield Curves for Datedunderlying liquidity in the last week of the

Percentage for the US Dollar in theSecurities – Weighted Average for

Domestic Inter-Bank Market and WeightedWeeks of May 2007 Averages of Call Rates for May 2007

the inflows by modifying the ECB regu

9

12.0

lations. Incidentally, with a view to intro

ducing derivative products in the credit

market, the RBI has issued draft guidelines

10.0 8.5

for the introduction of credit derivative

1st Week 2nd Week 3rd Week 4th Week

3 4 5 6 7 8 9 10 11 121316 18212223 31

5.5

Working Days -i 1-month 3-month 6-month Weighted Averages of Call Rates (Right Axis)

6.0

3.5

Yield (per cent per annum)

Per cent per annum

swaps.

Call Money Market

8.0 8

The gyrations in call money rates in the

7.5

past few months defied the sanctity of the

4.0

interest rate corridor defined by the floor

-0.5

2.0

succeeded in filling the void created by the absence of DFIs.

II Money, Gilt-Edged and Forex Markets

The operations in money and government securities market in May were influenced by the underlying liquidity scenario, which fluctuated widely between deficit and surplus modes. With the increased government spending and inflow of foreign currency assets in the beginning of the month, the liquidity situation turned positive; there was a sharp decline in overnight rates and the size of reverse repo bids tendered was huge. However, soon outflows towards dated securities and MSS auctions impinged on call rates and the Reserve Bank of India supported the market with increased repo bids. But, in the last two weeks of the month, as the RBI refrained from MSS absorptions along with the huge redemption inflows, the market sentiments again turned positive with overnight rate dipping to 1 per cent – a level not seen for a long time now. Yet, the market remained cautious and apprehensive of possible RBI measures in view of surplus liquidity and easing of the inflation rate.

A notable development of the money market observed in the recent past has been the overnight rates breaching the interest rate corridor set by the RBI. Moreover, as the RBI allowed the rupee to appreciate, there were concerns being expressed about its negative impact on exports; the minister for commerce and industry has been very vocal, even seeking intervention by the prime minister. As a result, the RBI began arresting the pace of the rupee’s appreciation. Also, while the US fed continued to of the reverse repo and ceiling of the repo

7

rates (Table 5). Moreover, due to the limit

Years to Maturity

** Separate reportings began on March 15, 2005.

[97.30] [5.55]

Table 7: Details of Central Government Market Borrowing

Date of Auction Nomenclature of Type of Notified Competitive Bids Competitive Bids Indicative YTM at Devolvement on Loan Auction Amount Received Accepted Cut-off Price Primary Dealers Number Amount Number Amount (in Per Cent) (Rs Crore)

9-May-07 7.55 per cent 2010 MSS 2000 165 9365 14 2000 8.03 per cent (Rs 98.74) NA 11-May-07 7.49 per cent 2017 Normal 6000 228 9454 181 5996 8.31 per cent (Rs 94.51) NA 11-May-07 8.33 per cent 2036 Normal 4000 244 10048 39 3997 8.64 per cent (Rs 96.71) NA 16-May-07 7.55 per cent 2010 MSS 6000 235 16605 10 6000 8.07 per cent (Rs 98.64) NA 25-May-07 7.38 per cent 2015 Normal 5000 292 17864 50 4992 8.24 per cent (Rs 94.90) NA 25-May-07 8.35 per cent 2022 Normal 3000 258 8556 45 2980 8.40 per cent (Rs 99.51) NA

Source: RBI Press Releases.

Table 8: Auctions of 91-Day Treasury Bills

Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount Outstanding Auction Amount Devolved Price Yield Rate on the Date of Issue No Face Value No Face Value on PDs (Rupees) Rate

(Amount) (Amount) (Amount) (Per Cent) Total With RBI Outside RBI

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

2006 May 3 2000.00 48 2749.00 38 2000.00 0.00 98.59 5.74 21003.09 0.00 21003.09

(3) (770.00) (3) (770.00) [98.59] [5.72]

2007 May 3 2000.00 54 2501.03 45 2000.00 0.00 98.12 7.69 92986.79 0.00 92986.79

(4) (1350.00) (4) (1350.00) [98.22] [7.27]

Figures in parentheses in cols 3 to 6 represent numbers and amounts of non-competitive bids which are not included in the total. Figures in the square brackets under cols 8 and 9 represent weighted average price and respective yield.

Economic and Political Weekly June 23, 2007 offered to the exporters as they have had the rupee to appreciate to Rs 40.45 on but it is expected to rise given the sharp to bear the brunt of both interest and May 29. With month-end demand for appreciation of the currency in the last two exchange rate pressures. Over the month, dollars and RBI intervention, the rupee months. Similarly, the REER index for sixthe rupee appreciated by 56 paise dipped to Rs 40.73 on May 31 (Graph B). currency with base-year 2005-06 at 106.24 despite relatively lower inflows of $ 4,125 The overvaluation of the rupee reflected shows an appreciation of 6.3 per cent over million with bulk of inflows in the itself both in the 36-currency and 6-cur-the February level. week ending June 1 against an inflow of rency indices. The REER index for 36-The forward premia declined across $ 4,953 million in April. With the easing currency trade-weight with base year maturity in May due to a number of factors of inflation and building up of expecta-1993-94 = 100 stood at 100.94 as of March such as strong foreign exchange inflows, tions that the RBI may begin to intervene

Table 10: Auctions of 364-Day Treasury Bills

(Amount in rupees crore)

Date of Notified Bids Tendered Bids Accepted Subscription Cut-off Cut-off Amount began covering their positions, which Auction Amount Devolved Price Yield Outstanding helped to restrain the rupee’s appre-No Face Value No Face Value on PDs (Rupees) Rate on the Date

(Amount) (Amount) (Amount) (Per Cent) of Issue

ciation. However, as domestic call rates became volatile affecting the returns pro-2006

May 10 2000.00 49 2015.00 32 1000.00 0.00 94.13 6.25 40237

file, the attractiveness of holding dollars (0) (0.00) (0) (0.00) [94.15] [6.21] waned. But a widening of the Chinese May 24 2000.00 52 4740.00 16 2000.00 0.00 93.97 6.43 40887

(1) (650.00) (1) (650.00) [93.98] [6.41]

yuan trading band supported the rupee’s 2007 May 9 2000.00 64 5100.00 24 2000.00 0.00 92.81 7.77 56942

(0) (0.00) (0) (0.00) [92.84] [7.73]The rupee-dollar exchange rate appre-May 23 2000.00 61 4211.00 44 2000.00 0.00 92.78 7.80 56292

(0) (0.00) (0) (0.00) [92.81] [7.77]

ciated from Rs 41.18 on May 3 to Rs 40.57 on May 7 due to a buoyancy in equities Figures in the square brackets represent weighted average price and the respective yield.Figures in brackets represent numbers and amounts of non-competitive bids which are not included in the total.

and huge inflows, but as the rupee touched a nine-year high, the PSU banks inter-Table 11: Profile of Major Commercial Bond Issues during May 2007

vened and the rupee dipped to Rs 40.78 Sl Issuing Company/Rating Nature of Coupon in Per Cent Per Annum Amount in on May 8 and further to Rs 41.34 on No Instrument and Tenor Rs Crore May 11; this followed apprehensions about FIs/Banks

AAA by Crisil and Care Bonds 10 per cent for 5 years 1200

ister voicing concerns about the rupee ap-2 NABARD preciation. With call money rates falling AAA by Crisil and Care Bonds 10.05 per cent for 7 years 200

3 Housing Development Bonds 10.35 per cent for 10 years and Zero coupon 450 to very low levels, the returns on Finance Corporation bonds for 7 yearsholding positions turned unattractive and 4 Housing Development

AAA by Crisil and Care NCD 10.25 per cent for 5 years 200(100)strengthening to Rs 40.93 on May 14 and 5 State Bank of Travancore AAA by Crisil and Care Upper Tier II Bonds 10.25 per cent for 15 years 300

6 IDFC Ltd output displaying good results, the expec-AAA by Icra and Fitch Bonds 10 per cent for 5 years 175(100)

1 LIC Housing Finance mentum and the rupee dipped to Rs 40.90 AAA by Crisil and Care Bonds 10.25 per cent for 10 years 200 on May 18. In addition, the widening of 2 Dewan Housing Finance Co Bonds 10.50, 10.55 and 10.60 per cent for 5, 7 and 38

AA+by Care 10 years respectively

Chinese yuan band propelled expectations Central Undertakingof RBI not intervening aggressively in the 1 Power Finance Corp Bonds 9.96 per cent for 10 years 530 AAA by Crisil and Icra

Total 3293 ciate. Moreover, the buoyancy in the stock Total for May-06 (a year ago): Rs 4377 crore. Total for April-07 (a month ago): Rs 1,300 crore.

Note: The amount shown in brackets above denotes the greenshoe option of the issue.and expectations of strong growth, pushed Source: Various media sources.

Table 12: Operations of RBI’s Liquidity Adjustment Facility**

Range of Repo (Injection)* Reverse Repo (Absorption)* Net Injection Net For the Week Repo/RR Bids Received Bids Accepted Bids Received Bids Accepted (+)/ Outstanding (Apr-May 2007) Period Number Amount Number Amount Number Amount Number Amount Daily Average Absorption (-) Amount

Days of Bids of Liquidity at the Accepted Week-End@

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

31 Mar - 05 Apr 07 1-4 74 37465 74 37465 21 6990 21 5681 1420.25 31784 -1455 09 Apr - 13 Apr 07 1-3 2 760 2 760 158 162570 158 14999 2999.8 -14239 3000 13 Apr - 20 Apr 07 1-3 205 83165 205 83165 10 525 10 525 105 82640 -16085 23 Apr - 27 Apr 07 1-3 119 47600 119 47600 31 6430 31 4229 845.8 43371 -9996 30 Apr - 04 May 07 1-3 67 25525 67 25525 8 1180 8 1180 393.33333 24345 -815 07 May -11 May 07 1-3 2 180 2 180 144 131030 144 14997 2999.4 -14817 2999 14 May -18 May 07 1-3 180 106445 180 106445 6 95 6 95 19 106350 -19670 21 May -25 May 07 1-3 67 34830 67 34830 9 745 9 745 149 34085 -4690 28 May - 01 Jun 07 1-3 0 0 0 0 247 254010 247 14977 2995.4 -14977 2996

Notes: * With effect from March 31, 2007 the Repo Rate is 7.25 per cent and Reverse Repo Rate at 6.00 per cent. ** Includes Second LAF Auctions under Repo and Reverse Repo. @ Net of Repo and Reverse Repo Outstandings.

Economic and Political Weekly June 23, 2007 build-up of reserves, and confidence in the the six-month forward premia declined 2.26 per cent, and 6.27 per cent to 1.18 per strong growth of the Indian economy com-from 6 per cent on May 3 to 2.60 per cent cent, respectively. Among the threetenures, bined with RBI’s limited interventions in on May 31 and the three-month and one-the one-month premia declined sharply as the market and surplus liquidity. As a result, month premia declined from 6.56 per cent to compared to the other two (Graph C).

Appendix Table: Secondary Market Operations in Government Papers – NDS and NDS-OM Deals

(-) means no trading YTM = Yield to maturity in percentage per annum CY = Current yield in per cent per annum SGL = (RBI’s) Subsidiary General Ledger OMO = Open Market Operations OMC SB = Oil marketing companies special bonds NDS = Negotiated dealing system OM = Order matching segment Notes: (1) Yields are weighted yields, weighted by the amounts of each transaction. (2) Current yield has not been worked out for treasury bills. (3) For Floating Rate Bonds (FRB’s) current yields are based on the latest half-year yield determined in the auction.

Economic and Political Weekly June 23, 2007

Primary Market

Dated Securities

In May, the government mobilised Rs 18,000 crore through normal borrowings and Rs 8,000 crore under MSS (Table 7). Under the normal borrowings, the government raised Rs 10,000 crore in the first instance on May 11 through the reissuances of 7.49 per cent 2017 and 8.33 per cent 2036 through price based auctions using a multiple price method for a notified amount of Rs 6,000 crore and Rs 4,000 crore, respectively. The 29-year paper was re-issued in April at a cut-off yield of 8.58 per cent while in May for the same paper a higher yield of 8.64 per cent was offered. The 10-year paper was re-issued after a long gap of more than two years.

In the second instance, the government re-issued 7.38 per cent 2015 and 8.35 per cent 2022 for notified amounts of Rs 5,000 crore and Rs 3,000 crore, respectively, through a price-based auction using multiple price auction method. For the 8-year paper, the cut-off yield was set at 8.24 per cent, while in April for the same paper it was at 8.16 per cent.

Three state governments tapped the market during the month to mobilise Rs 1,750 crore with the Kerala government auctioning 10-year bonds through yield based auction using multiple price auction method for a notified amount of Rs 350 crore for a cut-off yield of 8.34 per cent on May 10. In the second instance, on May 17, Andhra Pradesh and West Bengal issued 10-year bonds again through a yield-based auction using the multiple price auction method for notified amounts of Rs 400 crore and Rs 1,000 crore, respectively, at a higher cut-off yield of 8.40 per cent as compared to that offered earlier during the month. The issue of West Bengal was underwritten at a commission of 14 paise per Rs 100.

As per the modified MSS arrangements, the RBI mopped up an aggregate of Rs 8,000 crore through issuance of 7.55 per cent 2010. The yield on 7.55 per cent 2010 was set at 8.24 per cent on April 4 and 8.17 per cent on April 18, while in May, it dipped to 8.03 per cent on May 9 and edged up marginally to 8.07 per cent on May 16.

Treasury Bills

The yields on treasury bills displayed mixed trends with short-term yields declining as the liquidity situation improved but the long-term one showed an increase in the rates. The yield on 91-day bills rose from 7.35 per cent on April 25 to 7.69 per cent on May 3 as liquidity remained tight and then dipped to 7.60 per cent on May 12; thereafter it ruled steady at 7.64 per cent on May 16 and 23 and then eased to 7.39 per cent on May 30. Also, the yield on 182day bills eased marginally from 7.74 per cent on April 18 to 7.73 per cent on May 3, but rose to 7.75 per cent on May 16 and then dipped to 7.69 per cent on May 30. Unlike these, the yield on 364-day bills increased continuously from 7.75 per cent on April 25 to 7.77 per cent on May 9 and then to

7.80 per cent on May 23 (Tables 8 to 10).

Corporate Bonds Market

The corporate bonds market in May saw a number of financial institutions tapping the market as against the usual trend of banks being the dominant borrowers. As against a mobilisation of Rs 1,300 crore in April, there were nine issues in May mobilising Rs 3,293 crore though lower than that mobilised in May 2006 at Rs 4,377 crore (Table 11). Among the issuers, Nabard, HDFC and IDFC together accounted for 68 per cent of the total mobilisations in May with Nabard alone raising Rs 1,400 crore.

HDFC had offered 9.20 per cent for five years in February while in May it had to offer 10.25 per cent for the same maturity. Similarly, IDFC had offered in November 2006 a coupon of 8.60 per cent for five years while in May for the same maturity, it offered 10 per cent.

IV Secondary Market

Despite the surplus liquidity, the secondary market turnover for gilt-edged securities though ruling in an elevated range was lower than that observed in April. The weekly turnover ranged between Rs 7,857 crore and Rs 21, 217 crore as against a range of Rs 8,077 crore and Rs 23,801 crore in April. The trading in May improved particularly in the second half of the month as liquidity was sustained as the RBI choose not to absorb liquidity through MSS issuances and huge inflows due to government spending and redemption of securities. With inflation ruling easing, the market participants were apprehensive of RBI’s measures; they hence refrained from holding large positions and the sentiments remained cautious.

With the improvement in liquidity, the short-term and medium-term yields declined over the month while long-term yields remained range bound resulting in somewhat steep yield curve. The spread between 7.49 per cent 2017 and 12 per cent 2008 widened from 33 basis points in week ending May 4 to 41 basis points in May 25 and similarly the spread between abovementioned 10-year security and 8.33 per cent 2036 widened from 18 basis points to 35 basis points. The spread between the one-year and 29-year securities referred above widened from 51 basis points to 76 basis points (Graph D) (See also Appendix Table).

RBI Reverse Repos, OMOsand MSS

In May, both the reverse repo and repo window were used extensively as a liquidity management instrument in view of the increased government cash balances, coupon and redemption inflows resulting in huge reverse repo bids being tendered leading to RBI supporting the market with repo injections. As a result, the bids tendered for repo and reverse repo oscillated during the month. In the week ended May 4, RBI absorbed Rs 1180 crore and it injected funds worth Rs 25,525 crore, while in the next week, RBI received bids for Rs 1,31,030 crore of which only Rs 14,997 crore were accepted, as the underlying liquidity situation improved due to increased government expenditure and the liquidity injection was just Rs 180 crore. In the next two weeks ending May 18 and 25, RBI injected liquidity worth Rs 1,06,445 crore and Rs 34,830 crore as the outflows towards the dated securities auction adversely affected liquidity, while absorbing Rs 95 crore and Rs 745 crore, respectively (Table 12).

Given the improved liquidity scenario, the turnover in repo outside RBI increased from Rs 146,978 crore in April to Rs 1,91,154 crore but at a higher average interest rate of 9.40 per cent against 6.33 per cent in April.

Commercial Bonds

Unlike the secondary market for giltedged securities, the daily average turnover in the secondary market for corporate debt increased from Rs 38 crore to Rs 54 crore. With the increased interest rate uncertainty, the trading in floating rate bond increased Rs 210 crore to Rs 365 crore.

EPW

[The note has been prepared by Piyusha Hukeri and the accompanying statistical tables have been collated by V P Prasanth.]