Historically commercial banks have been reluctant to enter the consumer lending markets because such lendings were not perceived as productive, but with the massive growth of lendable resources and with consumption becoming a prime mover of economic activities, the distinction between consumption and production activities got blurred insofar as banks’ approach to lendings were concerned. Therefore, in recent years, across the globe, retail lending has been a spectacular innovation in the commercial banking sector. The surge in credit to the retail segment across developing and developed economies has occurred due to commercial banks shifting from traditional banking activities to a broad-based lending portfolio. The growth of retail lending is generally a reflection of the structural transformations taking place in modern economies with middle classes in particular, confident as they are of their secured future, prefer to lead a life style based on liberal consumption.

In the 1960s the bulk of the bank advances in India was directed to big and large established business houses and to large and medium-scale industries, while agriculture, small-scale industries (SSI) and exports – the hitherto neglected sectors – did not receive adequate attention. As a result, in 1967-68, the Government of India (GoI) initiated steps to institute social control over banks to remove certain deficiencies observed in the functioning of the banking system and to promote a purposive distribution of credit, consistent with the basic socio-economic objectives with an emphasis on financing the then neglected sectors like agriculture small-scale industries, and small borrowers. Subsequently, the nationalisation of 14 major commercial banks in July 1969 and another 6 in July 1970 led to considerable reorientation of the entire banking structure and its focus on credit delivery especially to the priority sectors of the economy; this gave an impetus to the process of reallocation of banking resources to suit the socio-economic objectives and needs of the Indian economy. As a result, institutional credit facilities were extended to a large number of borrowers of small means such as small farmers, small-scale manufacturers, retail traders, road transport operators, small businessmen, professionals and self-employed persons, and also for education, but in all of them overwhelming purpose of loans could be broadly described as “productive purposes” – either for working capital or for building productive capital assets.

I

Sectoral Distribution of Bank Credit

The sectoral pattern of bank credit distribution thus underwent a significant transformation after bank nationalisation. In the 1970s and 1980s, banks in India lent to those “productive sectors” of the economy, such as agriculture, industries, SSI and cottage industries, wholesale and retail traders, professionals and service providers like transporters. Since capital was scarce, it was felt that available resources had to be channelled to the directly productive and most deserving segments. In this respect, broadly three distinct phases are discernible: (i) first, until the beginning of the 1990s, there was a steady improvement in the share of agriculture in total bank credit which happened at the cost of industry share; (ii) second, the decade of the 1990s saw a reversal of the agricultural share with a steep decline in it with the industry share remaining generally static and with the services sector including “trade” gaining in importance; and (iii) the latest phase after 2000 in which the banks have aggressively moved in favour of retail loans in the form of personal loans for housing, consumer durables and other personal requirements; in this phase the share of agriculture has made a fractional recovery even as the industry share has continued to fall (Table 1).

Table 1: Share of Agriculture and Industry in Total Bank Credit of Scheduled Commercial Banks (Amount in Rupees Crore)
Year	Agriculture	Per cent to Total	Industry	Per cent to Total	Services and Retail	Per cent to Total	Total Credit
Dec-1975	1071	10.7	5777	57.7	3167	31.6	10015
Dec-1980	3722	15.7	11555	48.8	8397	35.5	23674
Dec- 1985	8850	16.9	21911	42.0	21468	41.1	52228
March 1990	16626	15.9	50846	48.7	36840	35.4	104312
March 1995	24948	11.8	96211	45.6	89780	42.6	210939
March 1997	31634	11.1	140314	49.3	112426	39.5	284373
March 2000	45638	9.9	213779	46.5	200664	43.6	460081
March 2002	64009	9.8	271626	41.4	320358	48.8	655993
March 2005	124385	10.8	446825	38.8	581258	50.4	1152468
Source: RBI, Basic Statistical Returns of Scheduled Commercials Banks in India, various years.

Emergence of Retail Loans

Retail lending is conventionally defined as lending to private individuals, as opposed to institutions. The retail lending market profile covers mortgage and consumer credit markets. The typical products offered in the Indian retail-banking segment are consumption loans for purchase of consumer durables, housing loans, educational loans and credit cards in addition to loans to individual against fixed deposits, bonds, shares, and debentures and gold jewellery. As shown in Table 2, personal loans/retail loans includes (a) loans for purchase of consumer durables; (b) loans for housing and (c) rest of the personal loans which include education loan, credit cards and all others described earlier.

After nationalisation, banks did start financing consumer durables. But, the range of credit offered was limited and banks’ own employees generally absorbed bulk of these loans. Financing of personal loans was extended to the general public in a very limited way. The share of personal loans/retail loans in total bank credit was 3.4 per cent in December 1972 and for the next 15 years, this share of around about 3.1–4.4 per cent was sustained between December 1972 and December 1987. In India, some foreign banks started financing the retail segment from the late 1980s and as a result, the share of retail loans increased to 6.4 per cent in total bank credit in March 1990.

There is a body of literature which enumerates the reasons for the banks’ unwillingness to lend to retail segment in the earlier years thus

(i) Low current income of households,

(ii) Lack of effective regulatory and legal background,

(iii) High costs of entering the retail market segment

(iv) Lending to large corporate clients was less risky and sufficiently profitable and

(v) Asymmetric information and adverse selection problems were more serious in retail lending markets

But, the fundamental questions of demand and supply and the structural needs which tended to confer a general emphasis on lending to “productive” sectors with implicit discouragement of consumption loans until the 1990s. Until then financing retail assets were primarily the domain of non-banking finance companies and most formal banking institutions did not actively offer the full range of retail products to their customers even though they had the required distribution infrastructure and retail client base.

Since the advent of liberalisation, the Indian economy has witnessed rapid changes in its structure with new opportunities for growth and expansion. Accompanying this phase has been the emergence of a strong middle class with high monthly earnings. Concurrently the financial sector has passed through a phase of transformation and convergence in the form of universal banking. It has also coincided with two key developments: first, financial sector reforms seeking above all better credit quality; and second, recessionary conditions in the economy who spawned a deterioration of production sector loans. Insofar as the banking sector was concerned, the transformation was evident on both the assets and the liabilities sides. On the assets side, banks started shifting from their historical business model of providing finance to corporates to aggressively focusing on financing retail assets such as housing, automobiles and commercial vehicles. This was driven both by the weak demand from corporates as well as the paucity of clients with good credit quality. The 1990s have also seen a more rapid expansion of high-street banking by new private sector banks and foreign banks. Particularly, the entry of the newer private sector banks and the marketing strategy adopted by them has precipitated this transformation. Consequently, retail finance has become the preferred business of banks on account of its higher spreads at a time when there has arisen increasing risk of defaults in corporate lending. Realising the pressure on profit margins and diversification opportunities, large banks as well as small banks entered the consumer lending market. This tendency got an impetus in the second half of the 1990s when industrial recession was deep. As a result, the share of retail loans in total bank credit had reached 10.5 per cent in March 1998 and it had further edged up to 11.2 per cent by March 2000.

Table 2: Segments of Retail Credit and Share in Total Bank Credit
							(Amount in Rupees Crore)
Year	Purchase	Per cent	Loans	Per cent	Rest of	Per cent	Personal	Per cent	Total
	of Consumer	to	for	to	the Personal	to	Loans	to	Credit
	Durables	Total	Housing	Total	Loans	Total		Total
1	2		3		4		5=2+3+4
Dec-72							191	3.4	5553
Dec-75	12	0.1	93	0.9	211	2.1	317	3.2	10015
Dec-78	25	0.1	199	1.1	329	1.9	554	3.1	17744
Dec-81	50	0.2	340	1.2	647	2.3	1037	3.7	28392
Dec-84	69	0.1	754	1.6	758	1.6	1581	3.4	46075
Dec-87	232	0.3	1596	2.3	1206	1.8	3034	4.4	68278
Mar-90	443	0.4	2536	2.4	3719	3.6	6698	6.4	104312
Mar-91	1014	0.8	3297	2.7	5287	4.3	9598	7.7	124203
Mar-92	736	0.5	4032	2.9	6419	4.7	11187	8.2	136706
Mar-93	798	0.5	5046	3.1	7685	4.7	13530	8.3	162467
Mar-94	643	0.4	5386	3.1	9140	5.2	15169	8.6	175891
Mar-95	710	0.3	5882	2.8	12292	5.8	18884	9.0	210939
Mar-96	881	0.3	7114	2.8	15634	6.1	23629	9.3	254692
Mar-97	974	0.3	7946	2.8	19282	6.8	28201	9.9	284373
Mar-98	1322	0.4	9632	2.9	23799	7.2	34753	10.5	329944
Mar-99	1906	0.5	12377	3.2	25306	6.6	39589	10.4	382425
Mar-00	2781	0.6	18525	4.0	30332	6.6	51639	11.2	460081
Mar-01	3463	0.6	25412	4.7	37065	6.9	65940	12.2	538434
Mar-02	3214	0.5	32826	5.0	46478	7.1	82518	12.6	655993
Mar-03	3221	0.4	49067	6.5	61654	8.2	113942	15.1	755969
Mar-04	4203	0.5	85346	9.7	89538	10.2	179087	20.3	880312
Mar-05	6349	0.6	126797	11.0	122836	10.7	255981	22.2	1152468
Source: As in Table 1.

The macro-economic scene described above became further weak towards the end of the 1990s, against the backdrop of lower interest rates, ample liquidity and industrial slowdown led to slackening of demand for industrial credit. At the same time, Indian corporates reduced their reliance on bank loans as source of financing their activities. Helped by benign interest rates and in an environment of competition, corporates improved their inventory and working capital management. As a result their internal resources got strengthened and debt-equity ratios eased. With increasing financial engineering corporates used their retained profits and increased their dependence on the capital market and external commercial borrowings more actively for raising the finances needed for growth and expansion. Consequently, the share of industry in the total loan portfolio of commercial banks declined to 46.5 per cent in March 2000 from 49.3 per cent in March 1997. Thus, with further lowering of industrial credit off-take and reluctance to expand their rural presence, commercial banks initiated to launch newer innovative retail loan products and market them aggressively for improving their credit volumes.

Consequently, over the last 6 years, the Indian banking industry has been witnessing a rapid bank credit growth in retail segment. A dominant aspect of banks’ credit delivery in the recent years has been the intensive focus they have bestowed on retail loans, which is reflected in a dramatic rise in the number of loan accounts for this category. Between March 2000 and March 2005, the number of personal loans accounts has shot up by 18.41 million or more than doubled, while the number of such loan accounts for “industry” has registered a absolute fall of 1.64 million. Such retail loan accounts at 14.42 million had constituted only 26.5 per cent of the total bank loan accounts only five years ago in March 2000 and now in March 2005, at 32.84 million they constitute about 43 per cent of the total (Table 3).

Table 3: Sector-Wise Incremental Share in Bank Credit: March 2000 to March 2005 (Number of accounts in actuals, Amount in rupees crore)
	MARCH 2005				MARCH 2000
Occupation	No. of Accounts	Per cent to Total	Amount Out-standing	Per cent to Total	No. of Accounts	Per cent to Total	Amount Out-standing	Per cent to Total
Agriculture	26656308	34.6	124385	10.8	20532891	37.8	45638	9.9
Industry	3716669	4.8	446825	38.8	5354140	9.8	213779	46.5
Transport Operators	577543	0.7	13721	1.2	974401	1.8	8075	1.8
Professional and Other Services	1469713	1.9	55266	4.8	1831185	3.4	14653	3.2
Personal Loans	32835257	42.6	255981	22.2	14420051	26.5	51639	11.2
Of which:
Loans For Consumer Durables	1510200	2.0	6349	0.6	1187325	2.2	2781	0.6
Loans For Housing	3666450	4.8	126797	11.0	2253390	4.1	18525	4.0
Rest of the Personal Loans	27658607	35.9	122836	10.7	10979336	20.2	30332	6.6

Trade	6091108	7.9	129646	11.2	7072533	13.0	71618	15.6
Finance	107968	0.1	73277	6.4	70485	0.1	21873	4.8
All Others	5696228	7.4	53368	4.6	4114711	7.6	32806	7.1
TOTAL BANK CREDIT	77150794	*100*	1152468	*100*	54370397	*100*	460081	*100*
Of which:
Artisans & Village & Tiny Industries	1288321	1.7	6149	0.5	2013171	3.7	2677	0.6
Other Small Scale Industries	939186	1.2	47076	4.1	2126150	3.9	35070	7.6
	Incremental Share
Agriculture	6123417	26.9	78747	11.4
Industry	-1637471	-7.2	233046	33.7
Transport Operators	-396858	-1.7	5646	0.8
Professional and Other Services	-361472	-1.6	40612	5.9
Personal Loans	18415206	80.8	204343	29.5
Of which:
Loans For Consumer Durables	322875	1.4	3567	0.5
Loans For Housing	1413060	6.2	108272	15.6
Rest of the Personal Loans	16679271	73.2	92503	13.4

Trade	-981425	-4.3	58028	8.4
Finance	37483	0.2	51404	7.4
All Others	1581517	6.9	20562	3.0
TOTAL BANK CREDIT	22780397	*100*	692387	*100*
Of which:
Artisans & Village & Tiny Industries	-724850	-3.2	3472	0.5
Other Small Scale Industries	-1186964	-5.2	12007	1.7
Source: RBI, Basic Statistical Returns of Scheduled Commercials Banks in India .

During the last five years, the amount outstanding of retail loans has increased four-fold and reached Rs 2,55,981 crore (22.2 per cent) in March 2005 from Rs 51,639 crore (11.2 per cent) in March 2000; as percentage of total bank credit, it has doubled.

The retail loan growth has continued in the financial year 2005-06 despite rising interest rates and the liquidity squeeze being faced by banks. ICICI Bank’s retail portfolio has grown by about 70 per cent in 2005-06 (up to February 2006) . The country’s largest bank, State Bank of India (SBI), has seen retail loans playing a major role in its overall loan portfolio growth and concurrently, the bank has in fact witnessed a 2 per cent drop in the growth of its loans to top corporates (see Table 4).

Table 4: Retail Loans of Major Banks (Amount in Rupees crore)
Bank	Outstanding Retail Loans
SBI *	59,434
ICICI Bank *	78,000
Punjab National Bank #	14,229
Bank of India #	12,767
* At end of February 2006 # At end of December 2005
Source: Various media sources

Retail Loans - Most Recent Trends

The incremental growth in personal loans was 27.0 per cent, largely a contribution of housing loans, credit card loans and educational loans. Housing loans outstanding as on January 20, 2006 have increased by 29.1 per cent (Rs 37,431 crore) to Rs 1,66,159 crore from Rs 1,28,728 crore as on March 31, 2005. Loans outstanding on credit cards have been up by 53.3 per cent or Rs 3,072 crore to Rs 8,832 crore during the period. Similarly, education loans outstanding have risen by Rs 3,884 crore to Rs 9,003 crore. The incremental growth in non-food gross bank credit up to January 20, 2006 has been 25.7 per cent. The outstanding non-food credit has increased by Rs 2,56,580 crore to Rs 12,56,368 crore. Industrial sector has availed Rs 66,480 crore of loans from the banking system in the first 10 months of 2005-06 against Rs 35,485 crore a year earlier. The increase in industrial credit in consonance with sustained growth in domestic industrial production has been mainly on account of infrastructure, textiles, iron and steel, chemicals, vehicles, gems and jewellery, food processing and construction. The infrastructure sector alone has accounted for more than a third of incremental credit to the industry, while textiles and iron and steel industries absorbed another one-fourth.

Table 5: Deployment of non-food credit
Sector	Outstanding as on January 20, 2006 (in Rupees Crore)	Percentage increase over March 2005
Agriculture and allied Activities	1,53,338	22.4
Industry (Small, medium and large)	4,93,372	15.6
Small scale industries	82,041	10.0
Housing	1,66,159	29.1
Education	9,003	75.9
Real Estate	24,527	84.4
Source: RBI (2006): Annual Policy Statement for the Year 2006-07.

Reasons for rapid retail credit growth

The lending to retail segment has rapidly increased on the strength of the realisation that retail lending has been a very profitable avenue for banks in India. This is also because defaults in personal loans have been comparatively negligible so far. The other reasons for buoyancy in retail credit lending are as follows:

(i) Favourable economic environment (high GDP growth, decreasing inflation, lower interest rates); economic prosperity and the consequent increase in purchasing power amongst the middle classes have given a fillip to a consumer boom;

(ii) Increased demand for housing loans encouraged by attractive tax benefits in urban areas;

(iii) Changing demographics indicate vast potential for growth in consumption both qualitatively and quantitatively; demographic transition in India has put a larger percentage of the population in the income earning age-groups;

(iv) Technological factors played a major role; convenience banking in the form of credit-cards, debit-cards, internet and phone-banking has attracted many new customers into the banking field and has contributed to the growth of retail banking in India;

(v) Treasury income of the banks, which has strengthened their bottom lines for the past few years, has been on the decline during the last two years; this has prompted the banks to look for substitute avenues of profit-making;

(vi) As stated above, the expansion of retail credit can be attributed to increasing affluent and growing middle class with high disposable income;

(vii) Vast diversification in consumption patterns accompanied by wider choices of consumer durables;

(viii)Increasing literacy levels and mindboggling expansion of the entertainment industry;

(ix) Increased acceptance of credit cards;

(x) Rapid growth of the services sector and urbanisation as a continuing trend

(xi) Increasing consumption mindset in India; and

(xii) Upper income segments in top 24 cities are growing at CAGR of over 25 per cent.

Housing Credit

In view of its backward and forward linkages with other sectors of the economy, housing finance in developing countries is seen as a social good. In India, growth of housing finance segment has accelerated in recent years. Several supporting policy measures like tax benefits and reductions in interest rates have increased the demand for housing loans.

The banks have distinct advantage of low-cost retail funds coupled with high availability of short-term funds and this gave them an edge. Most banks found that they can operate with higher spreads even if they offer lower lending rates. Further, housing finance traditionally has been characterised by low non-performing assets (NPAs). In addition, banks also have a good reach through their network of branch offices spread all over the country. Thus, banks have been eyeing the housing sector as a lucrative option for higher profit margins and lower risks. During the period 1996-2005, outstanding housing loans by scheduled commercial banks grew at a trend rate of 23 per cent per annum. The share of housing loans in total credit of scheduled commercial banks has increased from 2.8 per cent in March 1996 to 11 per cent in March 2005. Commercial banks, despite being late entrants, have overtaken the housing finance companies (HFCs) in the home loan market. The share of banks in total home loan disbursements has risen from 43.6 per cent in the year 2000-01 to 61.1 per cent in 2003-04. For most banks, both in the public sector and private sector, housing finance forms a huge chunk of their total retail loans.

Credit Cards in India

Though in the mid-1980s, the use of credit cards by customers of banks in India has been in vogue, it is only since the early 1990s, with the intensification of IT technologies, that these market has witnessed a quantum jump. The total number of cards issued by banks increased from 2.69 crore as on end December 2003 to 4.33 crore as on end December 2004. Almost all categories of banks issue credit cards, with the largest shares being accounted for by three large banks – ICICI Bank, Citibank and State Bank of India.

III

Challenges of Retail Credit in India

As brought out above, retail credit has expanded rapidly during the last decade. Although growing rapidly, retail credit still constitutes less than 7 per cent of GDP in India vis-à-vis about 35 per cent for other Asian economies – Thailand (18 per cent), Malaysia (33 per cent), Taiwan (52 per cent) and South Korea (55 per cent). This is essentially because India’s remains a poor economy, with its per capita income remaining at $628 as against the above from countries, ranging from $4,719 to $ 26,002 (all for the year 2004). India’s is also an extremely unequal economy, with vast masses being still unable to provide an effective demand base for superior consumer goods which fetch consumer loans. Even so, retail loans have immense opportunities in a growing economy like India and hence the buoyancy in retail lending is expected to continue in the coming years. However, it is undeniable that the rise in retail credit poses certain challenges.

Globally, as retail lending has evolved, there has arisen the risk profile for lending too. The surge in retail lending may accentuate indebtedness of households, with implications for sustainability of private consumption and saving in the medium to longer horizon. Rapid increase in retail loans may impinge on bank credit for investment activities with implications for economic growth. Several cross-section studies suggest that retail lending may pose various risks with implications for banks’ assets quality.

Risks in Housing Finance

As providers of housing finance, banks are exposed to certain risks, such as: credit risk – loss from loan defaults; interest rate risk – mismatch of assets and liabilities with different interest rate sensitivities; options risk – reinvestment risk from early repayment and liquidity risk – funding long-term assets with short-term liabilities, i.e., asset-liability mismatches. Most banks access their funds through short-term deposits ranging from 1-3 years. On the other hand, housing loans are lent for longer terms, normally for a period of 8-15 years. In this scenario, banks end up with borrowing short and lending long, consequently increasing their risks. To overcome this problem, some banks have been raising long-term funds through debt instruments.

Risks in Credit Cards

The Reserve Bank of India (RBI) has receiving a number of complaints in the recent period regarding various undesirable practices by credit card issuing banks and their agents. Some of them are:

(i) Unsolicited calls to members of the public by card issuing banks/direct

selling agents (DSAs) pressuring them to apply for credit card;

(ii) Charging very high interest rates/service charges; and

(iii) Lack of transparency in disclosing fees/charges/penalties, as also non-disclosure of detailed billing procedures

In view of the ever-increasing role of credit cards, a Working Group was set up by the RBI for strengthening the regulatory mechanism for credit cards. The recommendations of the Working Group are being processed within the RBI and a set of guidelines would be issued soon. The RBI is also considering bringing credit card disputes within the ambit of the Banking Ombudsman scheme.

As the credit card usage in the country has multiplied manifold over the last decade, so have the default rates. The delinquencies or NPAs in the card industry are estimated at around 8.5 per cent to 10 per cent but currently they are on the rise. Bank of Baroda’s BoB Card overdues have doubled to Rs.22.56 crore in 2002 from Rs.11.54 crore in 2000. SBI’s overdues in the credit card business were as low as Rs.40 lakh as on March 31, 2000, but have gone up to Rs.8.39 crore as on March 31,2001 and they were as high as Rs.26.79 crore as on March 2002. It is also to be noted that boom in credit card business had given rise to stray incidence of fraudulent practices such as forgery, theft, violence etc.

In spite of the risks involved, why are banks making such aggressive moves into the credit card market? It’s because globally around half of the profits of commercial banks come from credit cards. This also holds true for foreign banks in India like Citibank and StanChart, whose profits on the card business are estimated to be around Rs.100 crore. Among the Indian banks, SBI Card is estimated to be the most profitable with over Rs 50 crore as operating profit.

NPAs in Retail Loans

The overall impairment of the retail loan portfolio has worked out to 2.5 per cent and it compares favourably with gross NPA ratio for total credit, which has stood at 7.4 per cent (Table 6). Within the retail segment, the housing loans, which formed nearly 48 per cent of total retail portfolio, had the least gross asset impairment at 1.9 per cent while consumer durables segment had the highest gross asset impairment at 6.3 per cent. While new generation private sector banks (ICICI Bank, accounting for nearly 30 per cent of the domestic retail growth) have been able to create a niche in this regard, the public sector banks have not lagged behind. Leveraging their vast branch network and outreach, public sector banks like State Bank of India (SBI) whose retail segment constitutes 20 per cent of its total advances, have aggressively forayed to garner a larger slice of the retail pie. The retail lending of SBI grew by Rs 8,803 crore in 2003-04 as against an increase of

Rs 6,641 crore in 2002-03. At present, retail lending is largely confined to urban and metropolitan regions, but considering the rapid growth of semi-urban economies particularly through the IT industry, the potential for the expansion of retail lending is vast indeed.

Table 6: Retail Portfolio of Banks (As at end-March 2004)
	Items	Amount Outstanding (Rs. crore)	Impaired Credit as per cent of outstanding loans	Net NPAs as per cent of outstanding loans
(i)	Housing Loans	89449	1.9	1.4
(ii)	Consumer Durables	6256	6.6	4.0
(iii)	Credit Card Receivables	6167	6.3	2.4
(iv)	Other Personal Loans	87170	2.6	1.6
(v)	Total Retail Loans [(i)+(ii)+(iii)]	189041	2.5	1.6
(vi)	Total Loans & Advances	859092	7.4	2.8
Data pertains to Domestic operations. Source: RBI (2004): Report on Trend and Progress of Banking in India 2004-05.

Rising Sensitive Sector Loans

Amongst sensitive sector loans, commercial banks’ exposure to the real estate sector has almost doubled in the first 10 months of 2005-06 over the March 31, 2005. The total outstanding loans to real estate have risen by 84.4 per cent to Rs 24,527 crore as on January 20, 2006 from Rs 13,302 crore as on March 31, 2005 according to RBI’s report on macroeconomic and monetary developments in 2005-06. The sharp rise in loans to real estate has resulted in RBI announcing last month guidelines on banks’ exposure to real estate. The guidelines practically ban banks from lending to real estate developers for purchase of land. Banks are allowed to lend only after developers obtain all necessary approvals from the state and local authorities, which can happen only after the land is acquired. Credit to real estate has increased sharply, although it still constitutes only a small part – less than 2 per cent of outstanding non-food credit and around 4 per cent of incremental non-food credit.

Issues in Retail Credit

The current rapid credit growth is also accompanied by considerable robust growth in asset markets such as equity, gold and housing signifying the asset overvaluation could possibly become a concern. Besides, the Indian banking industry is yet to go through a complete cycle in the retail lending sector and therefore the extent of default risk is unknown if economic growth decelerates. Retail credit has expanded rapidly during the last decade and therefore, it is difficult to separate the trend and cyclical elements. Though lending to retail sector has positive welfare effects, simultaneously it also increases financial stability risks.

While retail banking offers phenomenal opportunities for growth, the issues are equally daunting. This is particularly so because the period has also seen vast expansion in bank lendings in favour of sensitive sectors which are not for “productive” sectors and which have a large degree of risk. Expressing concerns about the high growth witnessed in the consumer credit segment, the RBI has, as a temporary measure, put in place risk containment measures and increased the risk weight from 100 per cent to 125 per cent in the case of consumer credit including personal loans and credit cards (Mid-term Review of Annual Policy, 2004-05). As stated above, the RBI has also issued guidelines on banks’ exposure to the real estate sector. More recently, general provisioning for non-priority sector loans was increased from 0.25 to 0.40 per cent.

Yet another dominant aspect of bank lendings in the most recent period has been the phenomenal increases in credit to sensitive sectors which compromise of (a) capital market, (b) real estate and (c) commodities. Scheduled commercial banks together have a loan portfolio of Rs 59,030 crore against these sensitive sectors at the end of March 2005, a rise of 144 per cent in just two years. Of these the exposure to the capital market sector has galloped to Rs 22,606 crore in March 2005 from Rs 2,917 crore in March 2003 – a rise of 675 per cent. The sharpest increase in capital market exposure has taken place amongst private sector banks, from Rs 867 crore to Rs 19,533 crore during this period (Table 7).

Table 7: Bank Loans to Sensitive Sectors (Rupees crore)
	2004-05	2003-04	2002-03
Capital Market	22606	16442	2917	(674.9)
Real Estate	24803	14252	12464	(99.0)
Commodities	11620	9822	8810	(31.9)
TOTAL	59030	40515	24192	*(144.0)*
Figures in brackets are percentage change in 2004-05 over 2002-03 Source: Indian Bank's Association (IBA): Performance Highlights of Banks, various issues.

Individuals and stock brokers are the major borrowers of the capital market lendings which they may deploy for speculative purposes and the asset values of which have a tendency to fluctuate rather sharply. This has attracted the RBI’s expression of concern for possible systemic risks.

References

EPWRF (2006): ‘Increasing Concentration of Banking Operations’, Economic and Political Weekly, March 18-24, Mumbai.

EPWRF (2004): ‘Scheduled Commercial Banks in India – A 30-year Data Base’, Economic and Political Weekly, March 14-20, Mumbai.

Gopinath, Shyamala (2005): ‘Retail Banking: Opportunities and Challenges’, Lecture Delivered at IBA – Banking Frontiers International Conference, May 28, Mumbai.

Kảlmản, T (2005): ‘Retail Lending in Hungary’, The 5^th Regional Finance & Investment Conference for South-East Europe: Politics, Economics, Business & Finance, Dubrovnik.

Kochhar, C (2004): ‘New Perspectives in Retail Banking’, September 15.

RBI(2005): ‘Draft Technical Paper on Priority Sector Lending’, Mumbai.

RBI (2005): Report on Trend and Progress of Banking in India 2004-05, November 24.

RBI (2004): Report on Trend and Progress of Banking in India 2004-05, November 29.

Reddy, Y V (2005): ‘Banks and Corporates as Partners in Progress’, FICCI-IBA Conference on Global Banking:Paradigm Shift, Mumbai.

Roy, M (2006): ‘A Review of Bank Lending to Priority and Retail Sectors’, Economic and Political Weekly, March 18-24, Mumbai.

* This note is prepared by Mr Bipin K. Deokar.

State Trading Corporation (STC) has issued a fresh tender to import 2.2 million tonnes of wheat on June 12, 2006, which would close on June 20, 2006. The quality criteria for import have been eased to attract more bidders though payment terms have been kept unchanged. The new standards for wheat import have been approved to bring down to Codex level. Under the new tender, the moisture content level has been increased to 13.8 per cent from 13.5 per cent. Fumigation rule has been allowed to be altered and the tolerable level of fungi and pests allowed has been increased. The country, so far, has managed to buy only 8 lakh tonnes of wheat from a 3 – million – tonne tender issued in May 2006.

Wheat procurement by the central government in the rabi marketing year 2006-07, has reached its lowest ever level of 9.2 million tonnes as against the 14.8 million tonnes procured a year ago. The wheat stocks in the central pool have been less than the buffer norms of 17.1 million tonnes required on July 01, 2006.

The central government is considering several plans to conserve wheat stocks in the central pool like substituting wheat with coarse cereals, by diverting 1 million tonnes of coarse cereals towards the public distribution system (PDF), though it has managed to allocate only 1 lakh tones so far. The total consumption of wheat under the targeted public distribution (TPDS) and other welfare scheme is pegged at about 16.7 million tonnes. So far Rajasthan has agreed to increase offtake of coarse cereals under this scheme. Another option under consideration is to curtail wheat allocation under the Sampoorna Grameen Rozgar Yojana as well as under other the state-run welfare schemes.

Kharif sowings in 2006-07 are likely to be delayed by a fortnight due to heat wave prevailing during June 2006 that has interrupted the normal progress of monsoon after its early arrival in the country on May 26, 2006. The country has experienced a weak phase of monsoon after a normal progression up to June 05 – 06, 2006. According to Indian Meteorological Department (IMD), there is no need to prepare contingency plans for agriculture sowings so early since the overall rainfall in June, normally, is much lower than in that July and August apart from variability also being much higher.

The draft approach paper to the 11^th five-year plan (2007-12) has identified agriculture as the area requiring special attention. The paper has emphasized regaining agricultural dynamism and has called for ushering in of the second green revolution to raise the growth rate of agricultural GDP to around 4 per cent.

The latest statistics from Coffee Board of India have revealed 12 per cent decline in coffee exports from the country to 83,370 tonnes during January 01 - June 09, 2006 over the corresponding period of last year. This decline has been attributed mainly to the low availability, rising domestic consumption, and hoarding of coffee by farmers in anticipation of higher price realisations.

As per National Agricultural Cooperative Marketing Federation (Nafed), 143 thousand tonnes of onions have been exported from the country during January-May, 2006 at $150-200 per tonne on cost and freight basis. Nafed has procured onions at Rs 300 per quintal, much higher than the prevailing price of Rs 270 per quintal to curb the fall in price of the commodity in the domestic market, which has witnessed a bumper production in 2005-06. Onion production during the rabi season 2005-06 has been 4 million tonnes, a rise of about 15 per cent over the previous year.

Marine Products Export Development Authority (MPEDA) has plans to expand the area under shrimp and fresh water prawn cultivation by 1lakh hectares by the end of 2010. The move follows the inclusion of shrimp and prawns in the marine products export basket of the country. Total area under shrimp culture has stood at 1,40,682 hectares and that under scampi culture has been 43,433 hectares as on March 31, 2006.

The central government has approved setting up of National Fisheries Development Board (NFDB). The board has plans to spend Rs 2,100 crore for development of fisheries over the period of next 6 years and would carry out programmes like intensive aquaculture, reservoir fisheries, mariculture and infrastructure development.

INDUSTRY

The overall Index for Industrial Production (IIP) has registered a growth of 9.5 per cent in April 2006 as against 8.1 per cent growth recorded in April 2005, buoyed by a more than 10 per cent growth in the manufacturing sector and above 24 per cent growth in production of capital goods. The increase is substantial compared to the revised rate of growth of 8.2 per cent recorded in the preceding month even lower than the 8.4 per cent growth in March 2005. The manufacturing sector has grown by 10.4 per cent in April compared to 9.2 per cent in the same month last fiscal year. The growth in the mining sector, which also includes coal and crude oil production, has grown by 4.3 per cent from 2.8 per cent in the same month a year ago and electricity output has risen by 5.6 per cent as against 3.1 per cent in April 2005. In the same month, output of consumer durables has increased by 10.6 per cent from the earlier year while production of capital goods, a key barometer of industrial activity, has improved by 24.9 per cent.

The National Manufacturing Competitiveness Council (NMCC) is set to chalk out a plan for re-formulating the R&D-oriented incentives for the manufacturing industry for which it is preparing a 10-year blueprint. The move is in the context of the government’s plan to shunt out most tax exemptions, including R&D-related ones as part of the ongoing taxation reforms. The idea is to ensure that R&D promotion gets sufficient policy thrust, even as distortive tax exemptions are removed. While most developed countries, including US, Australia, France, Canada, provide tax incentives for promoting R&D more or less on a permanent basis with the government providing up to 35 per cent grant on research in countries like Canada, Germany, UK; the weighted deduction allowed in India results in a tax advantage of only 7-8 per cent.

The government has plans to do away with cubic capacity (cc) as one of the two criteria defining small cars which makes them eligible for a concessional excise rate of 16 per cent, against 24 per cent charged on other cars. Earlier the Budget 2006-07 notified two definitions for small cars to be eligible for 16 per cent excise - one, they must be shorter than four metres in length and two they must have engine capacity less than 1,500 cc for diesel engines and under 1,200 cc for petrol engines. The move would bring the definition of a small car in line with its definition in the Auto Policy 2002, which defines small cars as those whose length does not exceed 3.8 metres. The move will bring down the prices of the Indica Petrol, the Swift and the Getz - all petrol vehicles which qualify on the length criterion but have higher engine capacity of 1,400 cc, 1,300 cc and 1,300 cc, respectively - by 8 per cent or in the range of Rs 20,000 to Rs 25,000.

The Ministry of Small Scale Industry's (MSSI) effort to streamline the process of getting reimbursement for the cost of acquisition of an ISO 9000/ISO 14001 certification seems to be paying off. Under its incentive scheme of ISO 9000/ISO 14001 Quality System, the ministry reimburses up to 75 per cent of the total cost of acquisition of such certification (or similar certification) by a registered small unit, subject to a maximum of Rs 75,000 per unit. The Ministry has reimbursed 4,101 small units in 2005-06 and 3,314 units in the previous fiscal year with a total of Rs 19.44 crore being disbursed in 2005-2006 and Rs 17.33 crore in 2004-2005.

INFRASTRUCTURE

In the ranking carried out by the power ministry through credit rating agencies Crisil and Icra, Andhra Pradesh has ranked first among all states for its performance in the power sector during 2005-06, retaining its position for the third year in a row. It has delivered the best performance in terms of perusal of reforms, unbundling of its state electricity board and performance of the unbundled entities, establishment of a regulatory commission and its tariff orders. Gujarat and Delhi have retained their second and third positions respectively. Gujarat, whose unbundled entities have earned profit, has embarked upon a massive plan to add generation capacity, based on gas in particular. The state has also worked out a plan to implement a franchisee model in power distribution. Delhi has retained its position in the annual ranking, despite incidences of public agitation for frequent power plays. The distribution companies in Delhi have taken various initiatives to improve consumer services, though they will have to step up their efforts to reduce transmission and distribution losses. Maharashtra, where the unbundling of Maharashtra State Electricity Board completed a year, has shown improvement in its ranking from twelfth in the previous year to eighth in 2005-06. The state has taken several initiatives to add a capacity of 2,000 MW in the next three years besides initiating investment plans of Rs 60,000 crore.

The power ministry has formed a group, headed by the union power secretary and including the chairmen of NTPC and the CEA, to ensure that India can meet the target of adding a capacity of 75,000 MW during 2007-12, the 11th Plan period. With the government expecting to add 44,000 MW during the current Plan period ending March 2007, taking the total capacity to 1,44,000 MW, the goal for the 11th Plan translates into an average growth of 15,000 MW a year, against the present capacity of 8000 MW. Seven sub-groups have been formed to work out the details for key aspects like demand projection, hydro-thermal ratio, grid upgrade, energy conservation, rural electrification, transmission and distribution, and manpower training. Of the new capacity of 75,000 MW, 62,000 MW will be from conventional sources, 6000 MW from renewables and 7000 MW from captive power plants. Hydroelectricity will account for around 17,000 MW out of the total capacity for conventional sources. As a strategy, the government would like to depend less on natural gas because of uncertainties over availability and price and will take a similar stand regarding the nuclear projects chalked out to contribute 3000MW.

The sales of oil products have risen by 8.8 per cent in May 2006 to 9.97 million tonnes (mt) from 9.17 mt in the same month last year. Diesel sales in May have increased by 15.1 per cent year-on-year, while petrol sales have grown by 13.1 per cent. The consumption during May has risen due to increased buying by the dealers in anticipation of a rise in fuel prices and due to good agriculture demand in the states of Haryana, Uttar Pradesh, Rajasthan and Bihar. Aviation turbine fuel sales have spiralled by 28.1 per cent backed by the boom in the aviation sector coupled with holiday season. Kerosene sales during the month under review have gone up 2 per cent and that of cooking gas (liquefied petroleum gas) by 5.5 per cent compared to the previous year period. The sales of oil product by state-run companies during the month has increased 8.8 per cent on a year-on-year basis to 8.6 mt while private players, Reliance Industries and Essar, have increased retail prices of petrol and diesel in May, resulting in shift of sales to PSU retail outlets.

The Ministry of Coal has decided to move ahead with the plan to allow Coal India Ltd(CIL) to set up a new subsidiary company Coal Videsh Ltd (CVL) for acquiring coal blocks abroad and has plans to place the proposal for consideration by the Cabinet Committee on Economic Affairs (CCEA) by July 2006 despite objections raised by the Ministry of Finance, which has stated that CIL itself should do the acquisitions and there is no need to have a separate company. According to the plans, the new company would have a paid-up equity capital of Rs 1 lakh and an authorised capital of Rs 500 crore. Apart from acquiring coal blocks outside the country, Coal Videsh would also undertake import of superior grades of coal for the proposed coastal power plants in the southern and western parts of the country. Its proposed operations also include blending of imported coal with Indian coal to enhance quality.

INFLATION

The annual point-to-point inflation rate based on wholesale price index (WPI) has gone up to 4.72 per cent for the week ended June 3, 2006 from 4.68 per cent during the previous week. The inflation rate was lower at 4.39 per cent in the corresponding week last year.

The WPI in the week under review has increased by 0.3 per cent to 201.9 from 201.3 in the previous week (Base: 1993-94=100). The index of ‘primary articles’ group (weight 22.02 per cent) has risen considerably by 1 per cent to 202.2 from the previous week’s level of 200.2, mainly due to an increase in the price index of ‘food articles’ and ‘non-food articles’ by 1.1 per cent each, as compared to the previous week. The index of ‘food articles’ has gone up to 206.7 from 204.5 in the previous week, mainly due to the higher prices of tea, condiments and spices, milk, fruits and vegetables, moong, bajra and maize. The index of non-food articles has gone up to 178.8 from 176.9 for the previous week, mainly due to the higher prices of sunflower, raw rubber, soyabean, rape and mustard seed. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has remained unchanged at its previous level of 320.4. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has increased marginally by 0.1 to 175.3 from the previous weeks’ level of 175.1, mainly due to increase in the prices of food products, ‘rubber and plastic products’, ‘chemical and chemical products’ and ‘machinery and machine tools’.

The latest final index of WPI for the week ended April 8, 2006 has been revised upwards; as a result both, the absolute index and the implied inflation rate stood at 198.7 and 3.81 per cent as against their provisional levels of 197.6 and 3.24 per cent, respectively.

In a bid to cope with the rising cost of funds, Standard Chartered Bank, the country’s largest foreign bank has announced an increase in its home loan rates by 50 basis points. With the hike in interest rates in the home loans, the new rates would be 9.5 per cent on the flexible home loans and 10.5 per cent on the fixed home loans.

Amalgamation of regional rural banks (RRBs) by public sector banks has picked up momentum with banks like Canara Bank, Syndicate Bank and State Bank of Mysore (SBM) consolidating their RRBs as per government of India notification. The idea behind the consolidation of RRBs is to make them more competitive, achieve economies of scale, spread the risk and activities of RRBs to a wider area and to achieve efficiency in administration. Canara Bank, for instance, has amalgamated three RRBs in Uttar Pradesh to form Shreyas Gramin Bank. Likewise, Syndicate Bank, State Bank of India and SBM have also amalgamated their RRBs. Syndicate Bank has amalgamated four RRBs in Karnataka and three in Andhra Pradesh. The bank has also one RRB each in UP, Haryana and Kerala.

The Reserve Bank of India (RBI) has imposed a fine of Rs 5 lakh on the Bangalore-based Canara Bank for its inability to compile cash reserve ratio (CRR) returns, which is a violation of provisions of the Banking Regulation Act, 1949.

The Indian Banks Association (IBA) and department of post (DoP) would enter into a joint venture (JV) to increase the loan disbursement in rural areas. Banks plan to use the widespread network and outreach of the DoP for the disbursal of rural credit. The Maharashtra circle, where the project will be launched on a pilot basis, has over 12,000 post offices in rural areas. Under the JV arrangement, post offices across Maharashtra would act as agents of banks. In the rural and remote areas, where formal channels of credit are yet to reach, the DoP can play the role of a facilitator. The postman can personally verify the physical presence of the borrower. Besides, the rural borrowers are typically more punctual about repayment and therefore there are less chances of loans turning into non-performing assets. Under the proposed scheme, banks will sign an MoU with the district head post office. The postman attached to that post office will identify potential borrowers as per the RBI’s know-your-customer (KYC) guidelines. The DoP would get a commission of Rs 600 per application, irrespective of the amount of loan. The commission amount will be given as a specific incentive to post office staff including the postman, post master and clerical staff.

The issue of non-performing assets (NPAs) in the fast expanding retail segment has started haunting the domestic banking industry. The recent phenomena like high real estate prices, the rising interest rates and falling Sensex where a great deal of funds out of personal loans have been invested will impact the sticky assets in the retail segments. Increasing frauds have taken place mainly in the housing loan segment. Though it has not reached alarming proportions but the level of NPAs in the housing loan space was going up year after year. That is the reason why RBI also in its last credit policy have asked banks to increase the risk weight to assts.

FINANCIAL MARKET

During the week under review, the primary market remained subdued with no new issuer tapping the market. Meanwhile, Vigneshwara Exports Limited that tapped the market on June 6 has closed its issue on June 16 as it had achieved its target amount of Rs 52.36 crore to Rs 59.02 crore by offering a price band of Rs 110-124.

During the week, the market witnessed high level of volatility as after three days of continuous fall, the sensex registered its highest-ever single day gain in absolute point terms on June 15 as it gained than 600 points –615.62 points or 6.89 per cent to close at 9545.06, boosted by strong trend in the international markets. The previous highest single day gain was registered on June 9, 2006, when it gained 514.65 points. For the week ending June 16,t he sensex gained 74 points to settle at 9884.51, while S & P CNX Nifty gained 24 points, to close at 2890.35. Meanwhile, both the BSE Mid-Cap and BSE Small-Cap indices declined by 102.28 points and 163.28 points, to close at 4087.97 and 4891.01,respectively. On the other hand, among the sectoral indices, except for BANKEX, which registered a decline of 36.29 points to close at 4386.67 point, all the other sectoral indices have registered a gain. BSE CD index registered the highest gain of 63.63 points to close at 2684.03, followed by BSE FMC at 37.37 points to close at 1792.82 points.

Meanwhile, on June 12, both Deccan Aviation and Unity Infra Projects made their debut on the BSE. While, Deccan Aviation settled at Rs 98.85, a discount of 33 per cent over IPO price of Rs 148, Unity Infraprojects settled at Rs 471.70, a discount of 30 per cent over the IPO price of Rs 675.

Meanwhile, the FIIs continued to remain net buyers in the equity market for second consecutive week to the extent of Rs 302 crore with purchases worth Rs 8489 crore and sale of Rs 8187 crore; while the mutual funds remained net sellers in the equity market to prepare for possible redemption pressure, they sold around Rs 715 crore with purchases worth Rs 1506 crore and sales of Rs 2221 crore.

Sebi in a mover to ensure market safety and protecting the interest of the investors and also to further align the risk has tightened the margining system in the cash market. The Sebi circular said that the cash market margins, which are based on VaR, will also be updated 5 times a day, in lines with those in the derivative markets. The update may be carried out by taking the closing price of the previous day at the start of trading and the prices at 11.00am, 12.30pm, and 2.00pm and at the end of trading session. The new Sebi measure will come into force from July 10 for BSE and NSE, while for other stock exchanges it will be implemented from August 28,2006

During the week, the total turnover at the NSE’s F & O segment declined to Rs 113346 crore from Rs 119592 crore on a weekly basis, correspondingly the daily average turnover also declined to Rs 22669 crore from Rs 23918 crore. Product-wise, index futures contributed to the bulk of the trading at Rs 52918 crore, while stock futures turnover stood at Rs 45659 crore.

During the week, RBI has, under regular auction, mopped up Rs 2257.30 crore and Rs 1500 crore through 91-day and 182-day treasury bill, respectively; the cut-off yields for 91-day treasury bill was 6.1908 per cent and yield for 182-day treasury bill was set at 6.5014 per cent.

Meanwhile, the RBI has also announced the sale (re-issue) of 7.37 per cent 2014 paper for a notified amount of Rs 5,000 crore and 7.94 per cent 2021 paper for a notified amount of Rs 4,000 crore on June 22, 2006.

During the week, bearish sentiments prevailed in the market on account of interest rate worries as an unanticipated rise in the domestic inflation rate to 4.72 per cent for the week ending June 3 weighed down the market sentiments. However, decline in the international crude oil prices and expectations that the government might lower the tenure of the security at the upcoming auctions improvised the market sentiments to an extent. The YTM of 7.59 per cent 2016 paper rose to 7.8021 per cent on June 16,2006 as compared with 7.6713 per cent on June 9, 2006. Meanwhile, in the call money market, the call rates have traded around the reverse repo throughout the week to close flat at 5.75-5.85 per cent. The amount placed under the reverse repo averaged to Rs 47246 crore as against Rs 63005 crore in the previous week, while no bids were received at the repo auction.

UCO Bank will complete raising Rs 1100 crore within the first quarter of the current fiscal and would shortly seek approval for a financial restructuring plan from the finance ministry.

Foreign Exchange Market

During the week, with the fears of global risk aversion hovering over the emerging markets as well as dollar’s rise against other major foreign currencies the rupee touched Rs 46.04 per dollar intra-week. However, the rise in the domestic stock markets and the dollar’s weakness in the overseas market in the later part of the week saw the rupee recovering against the dollar and it closed the week above Rs 46 per dollar market at Rs 45.88.Meanehile, in the forward premia market, the six-month annualised forward premia closed marginally lower at 0.96 per cent on June 16 as compared to 0.97 per cent on June 9,2006.

Commodities Futures Derivatives

The commodity futures market witnessed highly volatile movement throughout the week with key economic indicators giving mixed data. Metals that had taken a plunge during the initial part of the week had recovered on an average by 30 per cent of the fall. Reuters Jefferies CRB Index that dipped to 330.3 in early part of the week recovered to close the week at 339.22. Meanwhile, the NCDEX Agri Index, which had opened the week at 1435.67 touched an intra-week high of 1444.54 points, before closing the week at 1434.53 points.

NCDEX has in a circular allowed early pay-in for bullion futures prior to contract expiry from June 15. The early pay-in would be allowed during the last five days prior to contract expiry, however, members would have to submit client details seeking early pay-ins. At present, traders having open positions on short side have to pay various margins during the last 5 days prior to expiry.

The first Gramin Suvidha Kendra (GSK), a joint initiative by India Post and MCX, has been set up at Jalgaon. This strategic alliance establishes a rural information access window for information support and services to farmers and agro markets of rural India. The farmers and traders in commodities can get price information and query on support services directly with a central hub for fast and accurate information.

CREDIT RATING

CARE has assigned ‘Grade 1’ to various maritime courses offered by Shipping Corporation of India –Maritime Training Institute (SCI –MTI). The grading draws strength from the outstanding infrastructure facilities of the institute, excellent training facilities, long experience of the management as well as the faculty, broad based guidance from the governing council, very good quality systems, proactive management policies and committed support from the SCI as a training department of the company, financial strength of the company, sustainability of the operations and reputations among shipping companies for various courses offered by the institute.

CARE has reaffirmed the ‘AAA’ rating to the bonds programme of Rs 1,800 crore of National Housing Bank (NHB). The assigned rating factors in the status of NHB as the apex financing institution for the housing sector, sole ownership of the RBI and strong asset quality.

CARE has reaffirmed the ‘AAA’ rating to the 54EC bond programme of National Highway Authority of India (NHAI) for a limit of Rs 2500 crore. The reaffirmation takes into account the high level of support that NHAI receives from the Central government due to its strategic importance as the nodal agency for implementing various road sector projects including different phases of National Highway Development Programme.

CARA has withdrawn the ‘AAA’ rating assigned to the Tier-III bonds programme of IDBI Capital Market Services Limited with immediate effect. The rating has been withdrawn based on the request from the company asking for withdrawal of the rating since these bonds have been fully repaid.

CRISIL has assigned 'AA/ Stable' rating to the upper Tier-II bond issue of UCO Bank. The assigned rating reflects the benefits of majority ownership by the government of India as well as the bank's adequate liquidity position and resource profile.

CRISIL has reaffirmed the project rating of 'PA2' to Marathon Nextgen Realty and Textiles Limited's (Marathon Nextgen's) Marathon ERA IV (ERA IV) project. The assigned project rating indicates that Marathon Nextgen's ability to execute the project as per the agreed quality levels, and transfer a clear title within the stipulated time schedule is high. The assigned rating reflects the good project profile, established track record of the developer and low funding risks. The good project profile for ERA IV is characterised by clear title, excellent location and good amenities. The project's promoter, the Marathon Group, has an established track record in Mumbai.

CRISIL has reaffirmed the ‘P1+’, ‘AA/Stable’ and ‘AA/Stable’ ratings earlier assigned to Rs 7.5 billion short-term debt programme, Rs 50 million non convertible debentures programme and Rs 250 million non convertible debenture programme, respectively of Global Trust Finance Limited (GTFL). The rating reaffirmations continue to reflect the strong financial, managerial, and operational support it receives from Exim Bank of India, who is GTF's single largest shareholder. Exim Bank's support manifests in funding lines, operational support by way of diversion of marketing leads for factoring, and managerial support through appointment of two nominee directors on GTF's board.

CRISIL has assigned a provisional 'AA- (so)/ Stable' rating to the Rs.1500 million bond issue of Karnataka State Industrial Investment & Development Corporation Ltd. (KSIIDC). The assigned rating is centrally based on the credit enhancement provided by state government, in the form of an unconditional and irrevocable guarantee to the proposed bond, as cash flows of KSIIDC are not sufficient to service the debt obligations of the bond programme.

CORPORATE SECTOR

Tata Motors has received an order worth Rs 55 crore from the Congo for revamping the urban transport system of Kinshasa (the capital city). The company has delivered 228 buses to the country under the Indian governments line of credit to Congo through the EXIM Bank.

Man Industries, the manufacturer of submerged arc welded line pipes and coating systems, has secured an order of Rs 400 crore from a gas transmission company in Iran for supply of 252 kilometre pipe line. It has also received another order worth Rs 100 crore from Reliance Industries for the supply of pipelines.

Larsen and Toubro (L&T) has secured Rs 481 crore turnkey order for setting upa water supply system for the Bisalpur water supply project from the Rajasthan Urban Infrastructure Development Project.

Godrej Beverages and Foods, an associate of Godrej Industries, has forayed into the organised confectionery market in India with the acquisition of Nutrine Confectionery Company for Rs 250 crore including its brand and manufacturing unit.

Ciba Speciality Chemicals (India) has signed a joint venture agreement with the Virchow Group, Hyderabad for the production of high quality Triclosan, an unit microbial ingredient used in a variety of products including toothpaste, soap, deodorants and non cosmetic and technical textiles; it helps to prevent the occurrence of oral infections, germ transfer, body odour and material decay.

L&T has signed a joint venture agreement with a subsidiary of Kuwait based Bader Al Mulla group. The new venture, Larsen and Toubro Kuwait Construction WLL, will focus on construction projects in oil and gas power and infrastructure with primary focus on electro-mechanical construction.

Nicholas Piramal India Limited (NPIL) has acquired Pfizer Incorporates plant located at Morpeth, UK for an undisclosed amount. As part of the deal NPIL also entered into a 5-year pact to manufacture 12 Pfizer products for $ 350 million.

India Cement has reported a growth of 32 per cent in its net sales at Rs 1,541 crore for the fiscal year ended 2006 and its net profit has stood at Rs 45 crore as against Rs 4.58 crore in the previous year

LABOUR

The Fifth Economic Census 2005 released by CSO has produced vital results on employment in agricultural (excluding crop-production and plantation) and non-agricultural activities in India during the period 1998-2005. As per the provisional results, there are 42.12 million enterprises in different economic activities all over the country. Out of these, the share of agricultural and non-agricultural enterprises is 15 per cent and 85 per cent, respectively. The total number of persons working in all the enterprises is about 98.97 million, more or less equally distributed in rural and urban areas.

Five states namely, Andhra Pradesh, Maharashtra, Tamil Nadu, Uttar Pradesh and West Bengal, have combined share of about 49 per cent of total employment in all enterprises.Interestingly, although Tamil Nadu has the highest number of enterprises, Maharashtra has offered the highest number of jobs (12 per cent of total jobs), followed by Tamil Nadu and West Bengal. This is because Maharashtra has a larger number of enterprises employing 10 or more workers (2 per cent of total number of enterprises employing 10 or more persons at all India level as compared to 1.5 per cent in Tamil Nadu). The National Capital Territory (NCT) Delhi also has a significant share of more than 4 per cent in total employment generation.

At the national level, the average annual growth rate in total employment during 1998 to 2005 has been registered at 2.5 per cent along with the average annual growth rate of 4.8 per cent in enterprises during the same period. Similarly, at the state level, while Kerala, Tamil Nadu, Mizoram and Tripura have exhibited over 8 per cent average annual growth in the number of enterprises, the states of Haryana, Jammu & Kashmir, Kerala, Sikkim and Tripura, have recorded over 5 per cent growth in total employment. Therefore, it is apparent that the states like Kerala and Tripura have employed more labour intesive techniques in their enterprises as compared to the other states that have shown higher growth rates in terms of number of enterprises.

Overall, the trend clearly shows that the enterprises are increasingly focusing on capital as means of production to maximize their profits. According to the Ministry of Statistics and Programme Implementation, the growth in employment is largely in line with the rising population. Therefore, it is significant to encourage more labour intensive industries like food processing industries, auto components and leather. Another aspect, which needs attention, is the organized sector employment, which has declined over the period of time. Nevertheless, the growth of 2.5 per cent in employment during the seven-year period ended December 2005 as compared to growth of 1.7 per cent during the fourth economic census (1998) leaves reasonable hopes for greater employment generation in future.

The Indian small and medium sized businesses (SMBs) are projected to spend Rs 26,709 crore in the year 2008 on information technology (IT), up from Rs 21,370 crore which they spent in the year 2005. The number of SMBs is also projected to increase from 51,891 SMB companies in 2005 to 53,963 companies in 2008. These are the findings of a study conducted by market research organization AC-Nielsen in association with the Computer Society of India (CSI). The study captured the trends in technology adoption by SMBs in eight cities, namely Mumbai, Chennai, Delhi, Kolkatta, Bangalore, Hyderabad, Pune and Ahmedabad. The highest proportion of SMBs, located in Mumbai and Ahmedabad, are expected to increase their IT spend by more than 20 per cent, higher than any other city. IT and ITeS companies are projected to make the highest increase in IT spend in 2008 to over Rs 7 lakh per organization from a little over Rs 6 lakh spend in 2006.

*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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