Current Economic Statistics and Review For the Week 
Ended May 14, 2005 (20^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

PERFORMANCE OF THE INDUSTRIAL SECTOR (2004-05)

o       The index of industrial production (IIP) (1993-94=100), after witnessing a very low growth rate of 4.9 per cent in February 2005, has recovered significantly to register an increase of 7.2 per cent in March 2005. This is  lower than the rise of 8.1 per cent during March 2004. The manufacturing sector and the mining sector expanded by 7.8 per cent and 5.6 per cent during march 2005, respectively, as compared to growth rates of 8.1 per cent and 5.1 per cent in the corresponding period of the previous year. However, electricity generation increased by only 3.0 per cent in March 2005 as against a much higher rate of 10.6 per cent in March 2004. The cumulative growth rate achieved by the industrial sector for the entire fiscal year 2004-05, stood at 8.0 per cent, as compared to 7.0 per cent registered during fiscal year 2003-04.

• Under use based category, basic goods and intermediate goods industries witnessed growth rates at 5.5 per cent and 5.8 per cent, respectively, during 2004-05 as compared to 5.4 per cent and 6.4 per cent in the fiscal year 2003-04. The capital goods industry continued its commendable performance and expanded at a rate of 12.6 per cent in 2004-05, on top of an equally impressive growth of 13.6 per cent in 2003-04. Both consumer durables and non-durables registered double-digit growth rates at 14.0 per cent and 10.4 per cent in the fiscal year 2004-05, reasonably, higher than the growth rates achieved by them in 2003-04 at 11.6 per cent and 5.8 per cent, respectively.

• The manufacturing sector, which has been the engine of growth for the entire industrial sector has displayed a broad based performance during 2004-05. Under the 2-digit classification, two industries have witnessed negative growth rates, while five have registered double-digit growth rates. Of the remaining ten industries, five have witnessed low growth rates between 0 per cent and 4 per cent, while the last five have witnessed growth rates between 4 per cent and 10 per cent.

BANKING HIGHLIGHTS

• With a view to promote Indian investments abroad and to enable Indian companies to reap the benefits of globalisation, the Reserve Bank of India (RBI) has raised the ceiling on remittances under automatic route from the present 100 per cent to 200 per cent of the net worth of the investing company as on the date of the last audited balance sheet. Under the automatic route for overseas investment, eligible Indian entities are now permitted to invest overseas either in joint ventures or wholly-owned company, however, the ceiling is not applicable to the investments made out of balances held in Exchange Earner’s Foreign Currency (EEFC) accounts and out of the proceeds of American depository receipts (ADRs)/global depository receipts (GDRs) issue, as hitherto.

• The RBI has issued guidelines for merger/amalgamation between two banking companies and amalgamation of a non-banking financial company (NBFC) with a banking company. While allowing dissenting shareholders to have a say in the amalgamation exercise, the guidelines say that the decision on merger/amalgamation should be approved by two-third majority of the total board members and not those present alone. It will be necessary that the directors who participate in board meetings are signatories to the deeds of covenants as recommended by the Ganguly working group on corporate governance. The respective boards need to give particular consideration, among others to: values at which the assets, liabilities and the reserves of the amalgamated company are proposed to be incorporated into the books of the amalgamating banking company and whether such incorporation will result in a revaluation of assets upwards or credit being taking for unrealized gains. The boards should also look into the shareholding pattern in the two banking companies and whether as a result of the amalgamation and the swap ratio the shareholding of any individual, entity or group in the amalgamating banking company will be violative of RBI norms or require its approval. In the case of amalgamation of an NBFC with a banking company, the banking company should obtain the approval of RBI after its board approves the scheme of amalgamation but before it is submitted to the high court for approval.

• Central Bank of India , in association with Life Insurance Corporation of India (LIC), has launched a housing loan scheme with a life insurance cover equivalent to the amount of outstanding loan. Home loan borrowers will now have the option of taking an insurance cover on payment of a single premium. In the unforeseen event of death due to any reason, LIC will pay the outstanding amount of the loan.

• Syndicate Bank’s global business touched Rs.74,031 crore as on March 2005 compared to Rs.64,290 crore in the previous year, registering a growth of 15.2 per cent on a year-on-year basis. However, the bank’s net profit for the year 2004-05 has declined by 7.1 per cent to Rs.403 crore over the previous year’s profit of Rs.434 crore. The bank plans to enter the BPO business to utilize excess man-hours and expertise available. The BPO will be operational in major cities like Bangalore , Chennai and Delhi whereas the head office will be in Manipal. 

INSURANCE

• Owing to intense competition and aggressive selling of life insurance products in the past 2-3 years there has been a significant rise in the number of lapsed policies. Life Insurance Corporation of India (LIC) has witnessed around 25 per cent lapsed policies whereas the private sector life insurance companies have experienced around 40 per cent. As per Insurance Regulatory and Development Authority (Irda), lapsation occurs out of forced selling. In order to achieve target, agents make use of his/her acquaintance and sells policies without taking into account the requirements of the policyholders.  Later on, the policyholders stops paying premium.

• In a bid to meet its capital requirements for its overseas expansion, Life Insurance Corporation of India (LIC) has sought over Rs.1,500 crore from the Centre. The first tranche of Rs.280 crore has already been disbursed. Despite the fact that LIC has huge surplus, estimated at Rs.10,988 crore in 2003-04, the life insurance behemoth, had sought the funds from the Centre as it cannot spend policyholders’ money to expand its overseas operations.

• Bajaj Allianz life insurance company has reported 357 per cent rise in its gross written premium in the fiscal year 2004-05 at Rs.1,001 crore as against Rs.219 crore in the previous fiscal. The first year premium has also witnessed a growth of 380 per cent to Rs.860 crore as compared to Rs.179 crore.

INFORMATION TECHNOLOGY

o    Having already emerged as the preferred destination for business process outsourcing (BPO), India has now set its sights on becoming a global hub for knowledge process outsourcing (KPO). The country stands to gain from its inherent strengths in the healthcare sector, pharmaceuticals and biotech sector and ICT sector which offer significant growth potential for KPO. India could emerge as a global KPO hub as the business requires specialised knowledge and the country’s large number of engineering and technical institutes are capable to address the manpower demand.

FINANCIAL MARKET DEVELOPMENTS

•         Capital Markets

•         Primary Market

• Shree Ganesh Forgings Ltd is to sell 50 lakh shares at a price of Rs 30 per share through an IPO, which is to open on May 18 and close on May 24. The money is being raised for constructing building for factory , purchase of balancing equipment for machining, expansion of installed capacity from 11,000 MT to 22,880 MT, additional working capital and meeting the issue expenses.

•         Secondary Market

o       During the week under review, the stock indices have moved in a narrow range; the BSE sensex ranged between 6451.54 and 6481.35 and NSE nifty between 1985.95 and 2000.75. A mix of news such as falling inflation rate and international oil prices, and expectations of revaluation of Chinese currency, influenced the market sentiments. Over the previous weeks’ close, both the indices have closed in positive territory with the BSE sensex registering a gain of 63.06 points and NSE nifty 20.8 points. The daily average turnover on the stock exchanges have risen to Rs 2,054 crore and Rs 3,874 crore from Rs 1,800 crore and Rs 3,581 crore for BSE and NSE, respectively. The higher turnover could be attributed to the number of block deals executed on the exchanges of Zee Teleilms, Aptech, Tata Tea and others.

o       Among the sectoral indices of BSE, the highest gain has been registered by BSE consumer durables index, followed by BSE capital goods index. While the BSE sensex has increased by 0.99 per cent, the BSE mid-cap and BSE small-cap have risen by 2.94 per cent and 6.75 per cent, respectively.

o       FIIs have been net sellers in equities during the period between May 1 and May 13 to the extent of Rs 114.5 crore with sales at Rs 6693.0 crore and purchases at Rs 6578.2 crore. During the same period, mutual funds have been net buyers to the extent of Rs 1425.93 crore with purchases at Rs 2906.59 crore and sales at Rs 1480.66 crore. 

o       Sebi has postponed the date of implementation of the Comprehensive Risk Management Framework for the cash market from May 18 to May 30.

•         Derivatives       

o       The trading in F&O segment has been subdued with an average daily turnover of around Rs 7,500 crore, despite introducing 21 more scrips on the segment.

o       The nifty futures for May expiry continued to trade at discount to the spot nifty index.     

•         Government Securities Market

•          Primary Market

o       All the state governments (excluding Chhatisgarh and Punjab ) have offered to sell 7.77 per cent 2015 for an aggregate amount of Rs 7,300 crore on May 17 by way of tap under normal market borrowing. In case of oversubscription, the states have the option to retain excess subscription to the extent of 10 per cent of their respective targeted amount.

•          Secondary Market

o       With a slide in international oil prices and fall in domestic inflation rate, the gilt-edged market turned buoyant. The weighted average YTM on 7.38 per cent 2015 has fallen from 7.25 per cent as on May 6 to 7.18 per cent on May 13.

o       As a follow up measure to the Annual Credit Policy for 2005-06, the RBI has permitted a standardized settlement on T+1 basis for all outright secondary market transactions in government securities from May 24. In case of repo transactions in gilt-edged securities, the settlement of first leg of the transaction could be either on T+0 or T+1 basis, depending on  their requirements.

o       RBI has permitted sale of government securities allotted to the successful bidders in primary issues on the day of allotment with and between CSGL account holders.

o       RBI has allowed non-scheduled urban co-operative banks (UCBs) and listed companies having gilt accounts to participate in repo facility (both repo and reverse repo) in government securities and treasury bonds.  

•         Bond Market

o       The state government of Maharashtra has reduced the stamp duty on corporate bonds transactions will now be Rs 50 for an Rs 1 crore deal or 0.05 paise on a volume of Rs 100. With this, the state government has brought parity in stamp duty levied on government securities and corporate bonds. Earlier, the duty structure had been of Rs 1000 per Rs 1 crore transaction in corporate bonds. The duty for delivery and non-delivery transactions in equities is Rs1 and 20 paise, respectively, for every deal worth Rs 10,000.     

o       IDBI has modified the term of IDBI Omnibonds launched on May 13 from 10 year and 3 months to 7 year. Also, IDBI is to raise Rs 15 crore through tier-II bonds. 

•         Foreign Exchange Market

o       The rupee appreciated against the dollar to touch Rs 43.30 in response to a report in a Chinese newspaper stating that the Chinese central bank might revalue the yuan earlier than expected. This reinforced the appreciating trend. However, following the denial by China ’s central bank chief, saying the report was factually incorrect due to an error in translation, the rupee depreciated. Further, as the dollar resurged against the euro and yen due to narrowing of US current account deficit, the rupee fell further to end the week at Rs 43.43 on May 13.

o       The six-month forward premia fell marginally to 1.51 per cent on May 13 from 1.58 per cent on May 6.

o       The volumes in non-deliverable forward (NDF) market have increased sharply due to speculative positions being taken by Indian banks on expectations of Chinese yuan revaluation. There is an arbitrage opportunity for bankers as they are buying forward dollars at Rs 43.50 for three-month forwards in the NDF market and selling forward dollars in domestic market for Rs 43.60.  

o       With a view to promote Indian investment abroad, the RBI has raised the ceiling of overseas investment by Indian companies from the present 100 per cent of the net worth of the investing company to 200 per cent of the net worth. Authorised Dealer banks may allow remittances under automatic route up to 200 per cent of the net worth as on the date of the last audited balance sheet of the investing companies.

COMMODITY FUTURES

o       The NCDEX agriculture index NCDEXAGRI has moved in a narrow range over the weekend from 1208.15 on May 7 to 1219.13 on May 14.

o       The RBI’s working group on Warehouse Receipts and Commodity Futures has recommended that the banks be allowed to participate in agriculture derivatives trading on proprietary basis within prudential limits.

PUBLIC FINANCE

o       The finance minister has introduced the Taxation laws (Amendment) Bill 2005, which provides with the facility to pay only 25 per cent penalty if tax evaders clear the disputed amount within 30 days of receipt notice. The bill also includes a proposal to double the exemption limit of the money received by individual and Hindu undivided families without any consideration to Rs 50,000. The exemption available to such amounts received at the time of marriage or as inheritance or from a relative will continue. The government has included money received from local authorities, charitable institutions and hospitals in the exempted category. The bill also provides for provisional attachment of properties of entities and persons on whom notices have been served under the central excise and Customs laws. New sections in the excise and the Customs laws propose to empower the government to publish the details of prosecution proceedings including the names of directors, treasurers, managers or partners of firms after the expiry of the appeal period. On the income tax, the Bill provides that accounts of education trusts, hospitals and charitable trusts, whose income exceeds the maximum amount not chargeable to tax-which instead of the present Rs 50,000 a year will now be subjected to audit-will have to file returns.

• The government has said that service tax assessees would not be eligible for input tax credit if the link between the taxable and service tax rendered was not established. For inputs that go into manufacturing, which qualify for Cenvat credit on excise paid, no service tax would be levied to avoid double taxation. The government has further, hinted at hiking the abatement for service tax levy in the construction sector for sub contracting services

o       The centre has said that VAT on drugs will not be levied on the MRP as indicated earlier at the retailers end but would be at the first point of sale at the manufacturer’s end. It will not be a multi-point tax system. However, for all other goods VAT would be continue to be levied on MRP. The empowered committee of state finance ministers on VAT is planning to assume quasi-judicial status to settle inter-state disputes relating to the new tax regime.

• The government has announced that it expects a rise in the collection of service tax by 2008-09 to touch Rs 1,06,000 crore. This announcement has signalled that there could be further rise in the service tax rate in the coming years. With the proposed integration of tax on goods and services and seamless credit, it is indicated that indirect tax rates could be revamped in such a way that the final cumulative incidence remained less than 12 per cent. 

INFLATION

• Inflation rate, based on wholesale price index has fallen to 5.7 per cent during the week ended April 30, 2005 from 5.9 per cent registered during the previous week. The annual point-to-point inflation rate was at 4.6 per cent in the corresponding week last year.

o       The WPI has risen to 192.1 from the last weeks’ level of 191.9 (Base: 1993-94=100) during the week in review. The index of primary articles’ group has declined a tad to 188.5 from the previous week’s level of 188.6, mainly due to a decline in the prices of food articles. The index of fuel, power, light and lubricants group has remained constant at previous week’s level of 293.2. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight has risen marginally to 170.8 from the previous weeks’ level of 170.4, especially due to rise in the prices of food products, chemicals and chemical products and basic metals, alloys and metal products.

• The latest final index of WPI for the week ended March 5, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 189.2 and 5.5 per cent instead of the provisional levels of 188.9 and 5.3 per cent, respectively.

o       After a reasonable drop in the inflation rate in March 2005, it has hardened during the month of April. Although the RBI has projected point-to-point inflation rate to be around 5 to 5.5 per cent during 2005-06, it had cautioned against international oil price pressures, which may in turn necessitate domestic oil PSUs to hike prices of petrol and diesel in coming weeks.

LABOUR

o       A trouble to bridge Rs. 716 crore Employees’ Provident Fund Organsiation (EPFO) deficit (as against estimated deficit of Rs. 927 crore earlier) is likely to be solved with the help of the money lying in unclaimed accounts of EPFO. EPFO accounts that are not operational for a period of three years are classified as ‘unclaimed accounts’. At the end of March 2004, Rs. 942 crore which was lying in the unclaimed accounts of the EPFO, is expected to be used for funding the gap arising out of the proposed 9.5 per cent interest rate for 2004-05.  The two other options under consideration for EPFO, are either to use Rs. 8400 crore lying in the interest suspense account or to use a part of the government securities maturing this year to meet the liability. However, according to Union Labour Ministry officials, these initiatives would put pressure on the EPFO’s earnings in subsequent years. Besides, money in the suspense account accrues to members as interest every year. In case of using unclaimed accounts of EPFO, the government will need to amend the EPF Act in order to allow the EPFO to use money lying in these accounts.

o       According to the Survey conducted for the Ministry of Finance, it is revealed that just about 19 per cent of those retiring in the next decade, or those in the age group of 51-60 years, will be possibly covered by formal retirement scheme. Among those who are covered by pension schemes, around 85 per cent are government employees. Less than 2 per cent of those not covered by pension schemes, will be able to support themselves after their retirement. According to the Survey, while the country has around 45 million earners in the 1951-60 age group, either government pensions or the Employees Provident Fund (EPF) or similar pension structures cover just around 8.3 million of them. Out of those who have no formal retirement schemes (36 million workers), it has been found that, only 2 per cent have savings that, if converted into annuities, are sufficient to pay for post-retirement expenses. These estimates are based on the assumption that these workers would be able to reduce their expenditure to half of what they spend currently. 

EXTERNAL SECTOR

o       India has a huge unutilised external assistance corpus of more than Rs 64500 crore on which a country paid a commitment charge of about Rs 90 crore during 2003-04.

o       World Bank’s private sector lending arm, International Finance Corporation plans to increase its lending to India , to about $500 million every year, from next year. This lending would be for the funding of various infrastructure projects.

o       The government intends to increase the use of technical barriers to trade (TBT) allowed by the World Trade Organisation (WTO) to curb the import of sub-standard goods so as to protect consumer’s interest.

o       The Lok Sabha has passed the special economic zone Bill, 2005 after the government submitted to pressures from the left parties and deleted a clause giving powers to states to put in place a special labour law exemption for units and developers of designated areas. The deleted clause proposed to empower states to exempt SEZs from provisions of state laws related to trade unions, working conditions, provident fund, maternity benefits and old age pension.

CREDIT RATINGS

o       Crisil has assigned AAA/stable rating to the Rs. 60 crore Tier-II bonds issue of Punjab National Bank. The rating reflects the bank’s strong market position, healthy resource profile, comfortable capitalisation and earnings, as well as the comfort provided due to its majority ownership by Government of India.

o       Following Century Enka’s announcement of its share buyback on May 07, Crisil has reaffirmed the earlier assigned AA +/ stable ratings to the company’s Rs. 18.3 crore non-convertible debentures issue and P1+ rating to the Rs. 50 crore short term debt programme.

o       Icra has assigned an A1+ rating to the Rs. 200 crore certificate of deposits programme of Bharat Overseas Bank (BOB). The rating takes into account the deposit cost advantage that BOB enjoys through a substantial proportion of non-resident deposits, its adequate capitalisation and the higher-than-required SLR (Statutory Liquidity Ratio) investments by the bank to support its short term liquidity position.

o       In an another exercise, Icra has upgraded the rating assigned to the Rs. 15 crore bond of Bharat Heavy Plate and Vessels from LBB (SO) to LBBB (SO) and also removed it from the rating watch. The revision in the rating is based on the unconditional and irrevocable guarantee by the center and also a structured payment mechanism devised for timely servicing of bond obligations. At the same time, Icra has also assigned an A1+ rating to the Rs. 4.35 crore certificates of deposits programme of the Indian branches of American Express Bank Ltd.

o       Fitch has assigned F1+ ( IND ) rating to the Rs. 25 crore commercial paper /short-term debt programme of Aban Loyd Chiles Offshore Ltd.   

Theme of the week:

Evolving Indian Financial System*
A Status Report

The last two decades have witnessed rapid structural changes in the country’s financial sector wherein there has been extensive diversification in the network of institutions, intermediaries, instruments and policies guiding and regulating the sector. The reform measures undertaken endeavoured to create a market-based competitive financial system; this made the traditional banking system face competition from insurance companies, mutual funds, capital markets and non-banking financial intermediaries. Despite attempts to introduce sophistication into the financial system, the traditional banking institutions has continued to play a dominant role; in fact, its role has expanded considerably with the acceptance of ‘universal banking’ philosophy.  

But, the financial system’s growth has been rather skewed, that is, the secondary market transactions have grown exponentially, while primary markets have been limping. Moreover, some of the financial institutions created in the past for supporting industrialisation and supplying medium and long-term credit for the corporate sector have been merged with banks on the considerations of undertaking multiple financial services  being carried on under one window and the thus achieve economies of scale, but this has led to a vacuum in long-term finance for industry; this is also because the corporate bond market, which was expected to fill the gap, has been rather subdued. 

A conspicuous aspect of the present financial system is the dominance of public sector, despite considerable efforts being made to diversify the structure; public institutions are still identified as safe and secure investment outlets. This is true not only in the banking system, wherein despite the entry of the foreign banks and new private sector banks, the nationalised banks continued to dominate both in terms of deposit mobilisation and credit disbursement, but also in the primary capital market with public sector banks and financial institutions dominated in raising funds. Overall, the primary market has been mobilising meagre amounts following the boom in 1994 wherein dubious companies mobilised amounts and vanished, jeopardizing the investors’ interest. It has been only in 2004 wherein a large number of public sector units tapped the market to mobilise huge amounts, that investors began taking interest in equity markets.

Review of the financial infrastructure

Prior to the implementation of financial sector reforms in the early 1990s, the system was characterised by segmentation and regulations over rates offered; it was operating on the basis of social considerations rather than profit considerations. The dominant role in mobilising savings and disbursement of short-term credit was carried out by the scheduled commercial banks and co-operative banks. For rendering medium and long term loans, a comprehensive structure of all-India and state-level development institutions for five broad economic sectors: industry, agriculture, export promotion, tourist resorts and housing had been set up. In addition, there have been heterogeneous sets of non-banking investment institutions such as Unit Trust of India (UTI), life and general insurance companies, investment corporations, and leasing companies. Some of these have been mobilising savings while others have been providing financial assistance. Finally, the capital market which facilitated raising of resources from the primary market was regulated by Controller of Capital Issues and a secondary market for trading in securities.

With the implementation of financial sector reforms, there has been an expansion in the number of regulators for different sectors such as capital markets and insurance with a view to introducing objectivity and transparency in regulations and also promoting their growth on healthy lines and protecting the interest of investors. Initially, the RBI was the sole regulator of the organised financial system, particularly of the banking sector. The first regulatory expansion took place with the establishment of Sebi in 1992 under the SEBI Act, 1992 for the purpose of protecting the interest of investors in securities, generally regulating the securities market and promoting its development on healthy lines. The next one was the establishment of Insurance Regulatory and Development Authority (Irda) Act, 1999 to protect the interests of insurance policy holders and to regulate, promote and ensure orderly growth of the insurance industry. The insurance industry has been opened up for the foreign and private sectors.

The number of financial intermediaries has increased considerably in the banking system, capital markets and insurance sector in recent years. A synoptic view of the Indian financial system is presented in Charts I and II, and in Table 1.

*              Formerly TDICI (Technology Development & Information Company of  India )

**            Formerly RCTCI (Risk Capital & Technology Corporation of India )

***          Formerly IRBI (Industrial Reconstruction Bank of India )

#              Following the bifurcation of UTI into UTIMF & Special Undertaking of UTI, only UTIMF is regulated by SEBI.

$              ICICI Ltd. merged into ICICI Bank on May 3, 2002.

@            IDBI Ltd merged into IDBI Bank on October 1, 2004.

      Notes:         1. Figures in brackets with respective institutions indicate the year of incorporation.

2. Figures in the brackets under SFCs/SIDCs indicate the number of institutions in that category.

3. NBFCs - Non-banking Financial Companies

4. RNBFCs - Residuary Non-banking Financial Companies

5. SIDCs - State Industrial Development Corporations

6. SIICs  - State Industrial Investment Corporations

7. SFCs - State Financial Corporations

Chart II

Banking System in India

 Note:  Figures in bracket represent number of banks.

 Secondary Market

 The focus of financial sector reforms has been towards promoting market-based structures and marketable instruments. Hence, the predominant role in the financial system is being played by the securities markets, which provides a channel for allocation of savings to investments in such a way that that the savers and borrowers are not constrained by their individual abilities, but by the economy’s corresponding abilities to save and invest which inevitably enhances savings and investment in the economy.  

Over the past few years, the securities markets have developed sharply in terms of secondary market transactions as compared to mobilizations in the primary market. The growth has been mind-boggling across all the secondary market transactions in equity and debt instruments. In addition, with the introduction of derivatives on equity instruments, the turnover on stock exchanges has grown exponentially. Incidentally, derivatives have been allowed on commodity exchanges, but this subject is not reviewed in this note.

Growth of Trading

The growth has been partly due to the technology-driven structural developments in the securities market and partly due to increased liquidity in the system. With the introduction of NSE’s screen-based trading terminals providing efficient and transparent trading system and clearing and settlement mechanism, the geographical reach has increased considerably and also trading has been made easier. For past few years, there have been huge foreign institutional investment inflows that have improved the liquidity in the system thereby facilitating increased secondary market turnover in both the debt and equities market. Between the two segments of debt market, the growth of gilt-edged securities has been substantial, while the corporate bond market has been constrained by limited investors’ interest leading to lower secondary market transactions. The secondary market transactions in government securities increased sharply following the huge inflow of foreign currency assets and pursuit of soft interest policy by the RBI.  

The annual turnover on the two major nation-wide stock exchanges, the BSE and the NSE, has been increasing from Rs 124284 crore and Rs 295403 crore during 1996-97 to Rs 1000032 crore and Rs 1339510 crore in 2000-01, respectively, due to the buoyancy in the economy and particularly in the information technology. After the bust of the IT bubble and slow down in the economy, the markets have been languishing. After 2003-04 and 2004-05, turnover has surged again. The most rapid growth has occurred in the derivatives segment’s turnover of NSE in a short span of two years, from Rs 442343 crore in 2002-03 to Rs 2563884 crore in 2004-05. 

Despite these changes, there has not been any commensurate rise in the number of investors operating in the market. Nevertheless, there has been some impetus to the growth in the number due essentially to two factors: the phenomenon of VRS in banks, financial institutions and the corporate sector; and second, reduced interest rate on bank deposits and other fixed-yielding savings instruments. The number of individual accounts at National Securities Depositories Ltd (NSDL) has increased from 3.8 million in 2002 to around 6.0 million as of end 2004.  Also the bulk of rise in accounts is observed between 2003 and 2004, which could be due to offer for sale of major public sector units that attracted a lot of investors interests’ – which could be yet another factor.     

Concentration of Trading

The trading is concentrated on a few securities/ members in equities market. During March 2005, the top ‘5’ and ‘100’ securities traded on NSE accounted for 22 per cent and 82 per cent of turnover respectively, and the top ‘5’ and ‘100’ members accounted for 15 per cent and 67 per cent of turnover, respectively.     

Even in the government securities market, the trading is concentrated as indicated by the data put out by Clearing Corporation of India (CCIL). In the month of March, the top 20 members accounted for 55 per cent of the total outright settlement and top 20 securities for 94 per cent.   

Primary Market Mobilisation

Among all the primary instruments of deposit mobilisations, the amounts mobilised by banks is much higher than those mobilised by debt and equity markets as also the mutual funds (Table 3).  While the share of private sector banks has been increasing gradually in deposit mobilisation, the share of foreign banks is declining over the years. Nevertheless, the bulk of mobilisation is still carried out by public sector banks - almost 74 per cent of the total deposits.

The mobilisation by equity public offering have been subdued for a long spell since 1996; it has been only in 2004 that the mobilizations have reached an all-time high of Rs 30, 510.83 crore, which has been almost equal to the collective raising of Rs 32,025 crore in the last 9 years – 1995 to 2003 (Table 4). This huge increase has come primarily due to the offer from sale (disinvestments) by 13 companies, of which 85 per cent or 7 companies were in public sector accounting for Rs 16,819 crore of the total Rs 19,808 crore mobilised through offers for sale. The balance 6 offers have been from private sector raising Rs 2,989 crore, of which the TCS mobilised Rs 2,778 crore.  

Though there has been a spurt in rights issue with Rs 3,616 crore being mobilised in 2004-05 as compared to Rs 1,006 crore in 2003-04, it is much lower than the all-time high mobilisation witnessed in 1992-93 of Rs 12,630 crore.

 NBFCs

There has been some kink in the data on deposit mobilisation by NBFCs because of the changes in their regulatory regime (Table 5 and 6). Following the irregularities in their operations, NBFCs, have been mobilising small amounts. In 1998, the amount raised by 1420 NBFCs’ was Rs 13,572 crore which has fallen to Rs 5,035 crore by 870 companies in 2003. However, RNBCs have continued to mobilise huge amounts of around Rs 20,000 crore during the period 1996-2003 though the number of RNBCs has declined from 11 to 5. 

Mutual Funds

 Even the mutual funds have not been effective in mobilising any sizeable amounts from the primary market. In advanced countries, they mobilise amounts at par with the banking system, while in India they are nowhere near the amount mobilised by the banks. Not only that the funds mobilised have been meagre, they have also been fluctuating from year to year based on the fortunes of the capital market.

House hold savings          

 The households’ savings the in gross domestic savings has increased from 17.0 per cent in 1996-97 to 24.3 per cent in 2003-04; in it financial savings have increased from 10.4 per cent to 11.4 per cent and physical savings have increased from 6.7 per cent to 13.0 per cent. Between 1996-97 and 1999-00, the financial savings have been higher than the physical savings, but thereafter they have been lagging behind the physical savings. Among the financial savings, banks continue to remain the chief mobilisers of savings.

A measure of diversification is found in changes in the pattern of savings of the household sector in the form of financial assets in recent years (Table 8). While the share of saving in the form of bank deposits increased from about 35.7 per cent in 1971-72 to 45.8 per cent in 1981-82, as a result of the measures implemented following the nationalisation of banks in 1969 wherein there was increased focus on deposit mobilisation through branch expansion and on credit disbursements.

With the implementation of policies for the diversification of the financial structure, impetus has been given to non-banking financial companies, shares and debentures, and mutual fund units. As a result, the share of bank deposits fell to 31.9 per cent in 1991. But, as the non-banking financial companies failed to retain investors’ interest due to the irregularities in their operations, their share fell sharply from the peak of 10.6 per cent in 1996 to 1.7 per cent in 2000. Also, the holdings of shares and debentures declined as a result of loss of investors’ faith in the companies tapping the markets. Consequently, the share of households’ investments in shares and debentures has been falling almost consistently from 8.4 per cent in 1991 to 1.8 per cent in 2004.

Also, UTI, which had acquired a status of safety and good returns due to its public ownership and assured returns scheme (particularly for the famous US 64 units), faced problems due to the bear phase in stock markets which made it difficult for UTI to service its assured returns scheme. UTI carried out mid-course reorganisation and portfolio rebalancing of its main scheme, US –64  to retain investors interest but due to the meltdown of the stock markets following the bust of IT bubble, the scheme again went into trouble which finally led to its breakup into a special undertaking of UTI and UTI Mutual Fund in October 2002. As a result, the investment in units of UTI has fallen from 5.8 per cent in 1991 to (-) 0.4 per cent in 2004. However, the public and private sector and even the foreign mutual funds have not been effective in attracting households’ interest.

The investments in provident and pension funds have fallen from 23.2 per cent in 1971 to 18.0 per cent in 1996. The fall has been due to lower employment generation in the organised sector; it has  also due to the voluntary retirement scheme applied in various sectors led to a fall in the overall employment. There was a temporary rise in 1998-99/199-2000 due to the implementation of the fifth pay commission recommendations; subsequently, it has fallen continuously to 13.0 per cent.

The claims of government, which includes postal savings (and earlier, compulsory deposits of central government employees), increased sharply from 5.0 per cent in 1971 to 13.4 per cent in 1991 due to the various tax exemptions offered on various instruments. The withdrawal of funds from the compulsory deposit scheme led to fall in claims of government to 7.7 per cent in 1996. However, there has been a sharp spurt thereafter due to the investment of VRS proceeds in these schemes, fall in stock indices, and problems in UTI. It has increased to 12.3 per cent in 2000. As interest rates declined but the returns on these schemes remained attractive despite some decline in their rates, their share has  reached a peak of 18.6 per cent in 2002-03 and  remained at 17.7 per cent in 2003-04.

            Life insurance schemes have been increasing their share in households assets continuously given the large potential. LIC was the sole player untill 2002 thereafter private sector players have entered.  There has been an expansion of market through better marketing and introduction of innovative insurance products.

What stands out distinctly is that the banks’ share has increased continuously in the post-liberlisation phase. It has been observed that as the economies develop and financial sector gets diversified, investors move away from banking sector to others such as mutual funds and non-banking financial intermediaries. For instance, in the USA mutual funds and banks mobilise resources almost at par. While in India despite the wide expansions of the number of institutions and instruments, bank deposits remain the most favoured investment option. Also, this has happened when the banks have been offering lower deposit rates and generally discouraged long-term deposits by offering lower interest rates. This is so partly because of the irregulatories in stock markets that discouraged investors from patronising them and partly because the government ownership of banks has been an added advantage as it has provided an assurance of stability and security. This in turn has led to a constant rise in the share of bank deposits in total household savings in financial asset from 31.9 per cent in 1991 to 42.8 per cent in 2004. 

Even among bank deposits, the share of public sector banks remains more than that of private sector banks; the former accounts for about 75 per cent while the latter around 15 per cent (Table 9). However, the share of public sector deposits over the period of 1990-91 to 2003-04 has declined from 87.6 per cent to 73.8 per cent and that of private sector banks has increased from 4.4 per cent in 1990-91 to 17.7 per cent in 2003-04. Nevertheless, the household investor seems to prefer public sector banks despite poor customer services; also of late they too have been changing.

Structure of Assets with the Banking Sector

The assets of banks have increased substantially over the period of about 14 years since the beginning of financial sector reforms. Under this, the role of development finance institutions (DFIs) has been curtailed as some of them have merged with banks: ICICI merged with ICICI Bank and IDBI with IDBI Bank. As a result, the banks’ assets have increased in the country.

Over the past 14 years, the share of banks financial assets has increased from 61.7 per cent in 1990-91 to 64.3 per cent in 2000-01. Following the merger of ICICI and ICICI Bank, the share jumped to 69.6 per cent in 2002-03 and thereafter it has grown continuously to 74.5 per cent.   This increase has been partly because of the weakness in the capital markets and NBFCs and partly because of the acceptance of universal banking philosophy. Meanwhile, the assets of financial institutions have increased from 35.5 per cent in 1990-91 to 37.9 per cent in 1998-99. Post merger, their share has fallen to 30.4 per cent of the assets in 2001-02 and further to 25.5 per cent in 2003-04 (Table 9). 

It was expected that the corporate bond market would facilitate mobilization of large capital to finance various projects. However, over the past decade, it has remained a neglected market with very small amounts being mobilized from primary market and also trading interest in secondary market has remained lackluster.               

The broad conclusion

It appears disquieting that despite the existence of a vast financial infrastructure, the expected diversification of household financial asset holdings has not taken place. It has been observed that in societies with limited social security facilities, image of financial institutions and banks as secure outlets becomes a prime consideration for asset holdings. In this respect, the public sector status of them confers such sense of security.  This is true not only for bank deposits but also for the mobilisations from equity markets by public sector units, which has been responsible for the said buoyancy in the primary market in 2004.

* This note has been prepared by Piyusha D. Hukeri and Bipin K. Deokar

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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