Current Economic Statistics and Review For the Week 
Ended January 20, 2007 (3^rd Weekly Report of 2007)

Theme of the week:

A Profile of Banks’ Non-Performing Assets (NPAs)
and the Provisioning Arrangements

A major achievement of the scheduled commercial system in the post-reform period has been the steady decline in the incidence of non-performing assets (NPAs) of banks.  In the mid-1990s, when the financial sector reforms effectively began, the gross NPAs of public sector banks had worked out to about 18 per cent of their gross advances.  As a result of concerted efforts made by banks to step up loan recoveries over years and prevention by them to reduce slippages by improving the quality of lendings, there has occurred sharp declines in the ratio of NPAs to gross advances.  The relevant ratios of public sector banks have drastically come down to 3.7 per cent at the end of March 2006 (Table1).

More significantly, it is the increasing provisioning made by banks against NPAs that have slashed the sizes of net NPAs for all segments of the banking industry.  Net NPAs were as high as 8.0 per cent of net advances for public sector banks in 1996-97 and now they have been slashed to as low a figure as 1.3 per cent.

As shown in Table 1, all segments of the banking industry have achieved significant reductions in gross and net NPAs.  And this has been achieved because of the sizeable amounts of cumulative provisions made against gross NPAs.  In the case of public sector banks, against an NPA level of Rs 42,106 crore as at the end of March 2006, Rs 25,106 crore have been provided for, that is, 59.5 per cent.  For the nationalised banks, these provisionings have reached as much as 65.6 per cent (Table 2).

NPAs Amongst Priority and Non-Priority Sectors

            Even as NPAs have generally declined rather significantly, a disquieting development that has occurred in the recent period has been the rapidly rising share of ‘priority sectors’ in total NPAs of all individual bank categories (Table 3).  This share in respect of public sector banks was 50 per cent in March 1995, while it was 46.5 per cent in respect of non-priority sector advances, with the advances for the public sector accounting for the balance of 3.4 per cent (Table 3).  This share of public sector banks in total NPAs had gradually fallen to 44.5 per cent as of March 2002 with the share of non-priority advances overtaking the priority sector share and touching the highest level of 53.5 per cent in total NPAs.

            But, what has happened after March 2002 should be truly worrying.  The share of priority sectors in total NPAs has sharply risen to 54.1 per cent while that of non-priority sectors has receded to 45.1 per cent at the end of March 2006; the share of public sector advances have dwindled to 0.8 per cent of total NPAs.

            What is more, within the ‘priority sectors’ category, the share of agricultural advances in total NPAs has increased from 13.8 per cent at the end of March 2002 to 15.0 per cent at the end of March 2006, while the share of SSI sector has fallen from 18.7 per cent to 16.7 per cent during the same period. What is most disquieting is the rapid increase in the NPA share of ‘other priority sectors’ which cover a number of retail loans, including housing loans, extended by banks during the past few years.  Their proportion has shot up from 11.9 per cent at end-March 2002 to 22.4 per cent at end-March 2006, the highest rise for any sector.

            This has serious implication for the health of the banking industry in the near future.

Tinder-Box of Agricultural Advances

            We entertain a similar worry in respect of the agricultural advances.  Doubling of bank credit for the sector has been pressed for the banking industry to achieve within three years up to the end of March 2007, which is a laudable objective but it has been sought to be achieved without proper preparations at the institutional and organisational levels of banks and also without preparing proper credit plans based on demand and household coverage considerations.  There has been 35.1 per cent increase in agricultural credit during 2004-05 and 37.6 per cent increase in 2005-06; it is reported that similar increase is taking place this year too.  It is probably because of this reason of high credit base that the NPA share of the sector has grown rather slowly in the recent period.  But, following the absence of proper preparedness on the part of the banking industry, the chicks are sure to come home to roost!

Highlights of  Current Economic Scene

AGRICULTURE  

The central government is not planning to put any kind of bar on the entry of private companies in procurement of wheat during the marketing season 2008-09. However, the Food Ministry might contemplate putting up some regulation at an appropriate stage after considering the crop size.  Private companies, during wheat procurement season 2006-07 had managed to procure 1.2-1.5 million tonnes wheat, offering Rs 30-50 over the government’s minimum support price of Rs 650 per quintal, which had contributed to the low procurement of wheat (9.2 million tonnes as against 14.8 million tonnes in 2004-05 season) by the Food Corporation of India (FCI) and the government was forced to import 5.5 million tonnes.

The central government has been reviewing a new national two-tier compensation package for farmers who could be losing their agricultural land to proposed industrial estates and special economic zones (SEZs). The new plan would include a one-time payment to the persons whose land would be acquired by the central government and also a long-term security arrangement through a staggered payment system. The second compensatory payment could be either a monthly or annual fixed amount to be provided by the companies that would set up the project and would continue for the lifetime of the project.

The commerce ministry has proposed to set up a new fund to help revive the sick floriculture units in the country. A survey by agricultural and processed foods exports development authority (APEDA) has revealed that there are about 39 sick floriculture units in the country. Out of these, about 16 units had been taken up for revival in the first phase earlier and of the remaining 23 units, only 18 could be revived. The arrears of the bank loans of these 18 units (which is likely to be between Rs 30 crore-40 crore) could be paid with the help of the proposed fund. A part of the fund could be utilised in providing transport subsidy to growers.

The government of West Bengal has plans to set up six food parks, based on the public-private partnership (PPP) model, in different districts of the state with the support of the central government. Mangoes, pineapples and tomatoes are the three main farm products singled out for processing. These food parks would provide support amenities such as cold chain and warehousing and help in facilitating export of value-added processed agricultural foods.

As per the industry estimates, onion exports from the country are likely to touch a record high of 1.2 million tonnes in 2006-07, registering an increase of 54 per cent from 778,134 tonnes exported a year ago. This has been attributed to high export demand from Pakistan , Sri Lanka , and other neighbouring countries, which have witnessed a large-scale destruction of the onion crop on account of adverse weather conditions. India has posted a rise of 59.3 per cent in terms of quantity to 884,137 tonnes during April-December 2006 and in terms of value, exports have surged to Rs 727 crore posting an increase of 37.7 per cent.

Cardamom output during the current season (July 2006-June 2007) is likely to drop by 30 per cent due to severe drought conditions prevailing in the country's main growing areas in Kerala's Idukki and Wayanad districts. The production in 2006-07 in Kerala is estimated to fall by 30 - 35 per cent.

According to solvent extraction association of India (SEAI), edible oil imports from the country has surged by 13 per cent 619,630 tonnes during November - December 2006 over the corresponding period of the last year owing to rising domestic demand and lower production. The share of palm oil imports has increased to 84 per cent from 69 per cent over a year to 523,204 tonnes. Soyabean oil imports, however, have fallen to 60,732 tonne (16 per cent) in November-December 2006 compared to last year. Imports of non-edible have declined marginally to 122,682 tonnes in the period under consideration from 123,694 tonnes a year ago.

The government is going to revise the price of levy sugar upward for the 2006-07 sugar season (October-September), facilitating sugar mills to reap higher revenues. Under the existing sugar policy, 10 per cent of the sugar produced by factories is requisitioned by the government as compulsory levy at a price fixed by it in every sugar season for distribution in the public distribution system (PDS).  In the current season, about 23 lakh tonnes sugar is likely to be bought as against 19 lakh tonne purchased in 2005-06. However, the ministry of food and public distribution has not prepared any proposal for providing subsidies to sugar companies for facilitating exports. Sugar mills in the country had asked the government to provide a subsidy of at least Rs 2,000 per tonne to make exports competitive amid a slump in world prices and a bumper harvest in other producing nations including Brazil and Thailand .

World sugar production is expected to increase by 3.2 per cent during 2006-07 to 149.2 million tonnes as against an upsurge of 2.8 per cent posted during 2005-06 on account of expected increase in sugar production of India and Brazil. World sugar consumption is expected to increase by 1.3 per cent during 2006-07 to 145.7 million tonnes, as compared to a growth of 1.1 per cent during 2005-06.  World sugar stocks, which had declined significantly during 2003-06, are expected to stabilise at 31 million tonnes during 2006-07, mainly because of higher production, and slower increase in consumption.

According to worldwide data compiled by the International Service for the Acquisition of Agri-Biotech Applications (ISAAA), India has emerged as the 5th largest grower of genetically modified (GM) crops by area. The entire 3.8 million hectares under GM crops is under Bt cotton accounting for 60 per cent of the country's total 6.3 million hectares area under cotton hybrids. The total coverage of Bt cotton, during 2002 - 2006, has increased from just 50,000 hectares from 3.8 million hectares. The major Bt cotton-growing states have been Maharashtra (1.84 million hectares), Andhra Pradesh (0.83 million hectares), Gujarat (0.47 million hectares) and Madhya Pradesh (0.31 million hectares).

The global oilseeds production for 2006-07 is projected at the highest ever level of 395.4 million tonnes supported by a record soyabean output of 226.8 million tonnes of which 86.8 million tonnes has been accounted by the US, followed by Brazil (56.0 million tonnes) and Argentina (42.5 million tonnes). World vegetable oil production in 2006-07 is expected to surge to 123.7 million tonnes (from 118.1 million tonnes of last year), while world usage is forecast to expand even faster to 122.1 million tonnes compared to 115.6 million tonnes of the previous year. Ending stocks of vegetable oil are projected at 9.7 million tonnes, slightly below previous years 9.9 million tonnes.

As per the estimates of USDA, global wheat production for 2006-07 is likely to be 590.7 million tonnes, down from the record 619.8 million tonnes of last year. While world wheat usage is projected to fall to 616.3 million tonnes (against 623.7 million tonnes of previous year), the ending stocks have been pegged at 126.8 million tonnes (compared to 147.4 million tonnes of last year).

Financial Markets

Capital Markets

Primary Market

Cinemax India Ltd, Technocraft Industries ( India ) Ltd, House of Pearl Fashions Ltd, Global Broadcast News Ltd, Pochiraju Industries Ltd, and Akruti Nirman Ltd have tapped the market during the week under review.

Secondary Market

The BSE Sensex closed for the week 126.18 points higher, to close at 14,182.71 and the Nifty settled at 4,090.15, a gain of 37.7. The previous week’s bullish sentiment continued and the 30-share BSE Sensex advanced 73.11 points, to 14,129.65, on Monday. This was a new high for the index. On Wednesday, the sensex closed at 14,131.34, an all-time high for the index. On Thursday, the 30-share BSE Sensex gained 86.41 points (0.6 per cent), to settle at 14,217.75, again a record closing. Reliance Industries (RIL) firmed up to a record high ahead of the results. RIL, Infosys, Wipro and TCS have reported a stunning quarterly growth after trading hours. Weak Asian markets and disappointing Q3 results from Satyam Computers weighed heavy on the domestic sentiment.

Among the sectoral indices of BSE, except for IT, metal and auto indices, all other have registered positive gains with the highest gains recorded by capital goods index of 2.9 per cent. As against a gain of 0.9 per cent for BSE sensex, the mid-cap and small-cap indices have risen by 1.69 per cent and 2.56 per cent, respectively.

Between January 1 and 19, FIIs have been net sellers of equities of Rs 487 crore with purchases of Rs 31,866 crore and sales of Rs 32,354 crore. Also, the mutual funds too have been net sellers in this period to the extent of Rs 148 crore with purchases of Rs 8,357 crore and sales of Rs 8,505 crore.

Assets under management of the mutual fund industry were Rs 3.235 trillion in end-December, down 5.21 per cent over previous month, on huge outflows in liquid funds, according to Association of Mutual Funds in India data. In November, assets rose 10 per cent led by inflows in cash plans and rise in stock indices. During December, advance tax payments and hike in banks’ cash reserve ratio took a toll on liquid funds, which recorded 20.15 per cent erosion in  assets.Companies redeemed investments in liquid schemes to make advance tax payments, which were due by December 15, and while banks redeemed to meet CRR requirements.

According to the World Federation of Exchanges (WFE) data, while the NSE recorded a 61 per cent growth in market capitalisation, the BSE saw a 59 per cent growth for the period January-November 2006. While the NSE has recorded the highest increase in listings at close to 11 per cent among major bourses till November 2006, BSE maintains a clear lead over other bourses across the world as the exchange with the largest number of listed firms. While the Shanghai exchange clocked a record 158 per cent growth in market capitalisation and the Shenzhen bourse saw a growth of 78 per cent, this comes on a much smaller market cap base in comparison to BSE and NSE

Derivatives

The total derivatives turnover declined marginally from Rs 154,836 crore in the week ended December 12 to Rs 153,695 crore.

 The FIIs were net buyers in F&O segment during the week under review at Rs 1,300 crore as against Rs 1,400 crore in the previous week. FIIs hold open interest of Rs 17,000 crore in stock futures and Rs 13,177 crore in index futures.

As per a NSE circular, trading members should “charge brokerage for options contracts on the premium at which the option contract was bought or sold and not on the strike price. Brokerage on options contracts shall not exceed 2.5 per cent of the premium amount or Rs 100, whichever is higher.” This would mean that if an option contract for a stock currently traded at Rs 100 was bought at a premium of Rs 10, earlier the investor was required to pay brokerage for the strike price of Rs 110. However, STT continues to be levied on the strike price. While as per the rationalised structure, investors are required to pay brokerage only on the premium of Rs 10; they still need to pay STT for the strike price of Rs 110.

Government Securities Market

Primary Market

RBI conducted the auction of State Development Loans (SDLs), 2017 for four state governments for an aggregate amount of Rs.1,214.59 crore. The cut-off yield of SDL 2017 was 7.99 per cent for Andhra Pradesh, Goa and Kerala and 7.96 per cent for Tamil Nadu

The Government of India has announced the sale (re-issue) of 7.94 per cent 2021 for a notified amount of Rs.5000 crore through a price based auction using multiple price method on January 25, 2007.

Secondary Market

During the week, the weighted average call rates during the period ranged between 7.86 per cent and 8.12 per cent, while weighted average repo rates ranged between 7.05 per cent and 7.33 per cent and the weighted average CBLO rates ranged between 6.90 per cent and 7.26 per cent. The average volumes of Call, Repo and CBLO segments were Rs.11,985.49 crore, Rs.6,943.97 crore and Rs.16,229.71 crore respectively. The daily average outstanding amounts in the LAF (reverse repo) and LAF (repo) operations conducted during the period were Rs.171 crore and Rs.13,332 crore respectively. The weighted average YTM of G.S 2016 7.59 per cent bond was 7.7821 per cent on January 19,2007 as compared to 7.5308 per cent on January 12,2007. The 1-9 year YTM spreads increased by 14 bps to 53 bps.

SEBI has now been decided to further enhance the existing limit of US $ 2 billion available for investment by FIIs in Government Securities/ T-Bills to US $2.60 billion. The incremental limit of US $ 0.6 billion is being added to the existing headroom of US $55 million available for investment by 100 per cent debt FIIs in Government Securities/ T-Bills. The enhanced limit is being allocated among the 100 per cent debt and general 70:30 FIIs/Sub.

Accounts in the following manner:

Bank of Japan maintained its uncollateralized overnight call rate at 0.25 per cent.

Bond Market

Yes bank has tapped the market to mobilise Rs 150 crore (green shoe option of Rs 75 crore) by offering 9.60 per cent for 15 years.

Foreign Exchange Market

The six-month forward premia closed at 3.67 per cent (annualized) on January 19, 2007 vis-à-vis 3.30 per cent on January 12, 2007.

The return on the country’s foreign exchange reserves improved to 3.9 per cent for July 2005-June 2006 from 3.1 per cent in 2004-05, helped by hardening of short-term interest rates. The reserves are invested in multi-currency, multi-asset portfolios as per existing norms, which are similar to international practices, as per RBI’s report. India ’s investments in securities declined to $ 34.15 billion at end of September 2006 from $ 35.17 billion at the end of March 2006. As on end-September 2006, of the total foreign currency assets of $158.3 billion, $76.4 billion was deposited with other central banks, BIS and IMF and $47.7 billion was in the form of deposits with foreign commercial banks. On the adequacy of the reserves, RBI said the ratio of short-term debt to reserves increased slightly to 6.4 per cent as on end-September 2006 from 5.7 per cent as on end-March 2006. The ratio of volatile capital flows (defined to include cumulative portfolio inflows and short-term debt) to reserves declined from 43.4 per cent (end-March 2006) to 42.0 per cent by end of first half of financial year ending September 2006.

Commodities Futures derivatives

National Spot Exchange Ltd, an exchange for agricultural produce, has received the approval from the Rajasthan government to commence its operation. Rajasthan is the first state to approve screen-based spot trading in agricultural commodities. According to the APMC Act, spot trading for agricultural commodities would require approval from the respective state governments.

The Multi Commodity Exchange (MCX) is planning to launch forward trading in jute and steel ingots in the next few months. While steel ingot futures are scheduled to be launched by the end of the current quarter, jute futures are expected in July.

The MCX promoted National Spot Exchange Ltd (NSEL) is planning to hold spot trading in natural gas and agri-inputs. This is apart from the proposed promotion of electronic spot trade in agri-produce. The natural gas market is fast maturing in India . The slew of discoveries in the recent past and projected sharp rise in supply beginning 2008-09 may make natural gas an widely used source of energy in the country, said Mr Lamon Rutten, Joint Managing Director of MCX.

Corporate Sector

Reliance Industries (RIL) registered rise of 57.6 per cent in its net profit for the third quarter of the current financial year, led by 48 per cent growth in petrochemicals and 37 per cent growth in refining businesses. Net profit for the quarter was Rs 2,799 crore compared with Rs 1,776 crore in the previous corresponding period. Total income rose by 44.5 per cent to Rs 26,514 crore over the same period last year and operating profit went up 50.5 per cent to Rs 4,751 crore.

In an effort to expand its oil exploration programme globally, ONGC has recently signed an agreement with Brazil ’s Petrobras. As per the agreement both companies would partner in offshore exploration and production facilities in India and Brazil and will jointly bid offshore exploration blocks in the forthcoming New Exploration Licensing Policy (NELP) rounds in India and Brazil’s ninth round of bidding slated to be held in the second half of 2007.

In the back-drop of the current oil price fluctuations, sustaining better production from ageing fields and enhancement of recovery factor are important activities for any oil company. Oil and Natural Gas Corporation (ONGC) has recently signed a memorandum of understanding with Tatarska Geophysica Technologies (TGT) of Russia for increasing production of matured fields. TGT is a Russian service provider in well and reservoir management operating in number of countries, particularly in the Asian region. The average recovery rate from ONGC’s oilfields is between 28–30 per cent. The objective of the MoU is to regain production in the ageing fields and also arrest declining extraction from matured fields with TGT’s latest technology, which can increase the recovery factor up to as much as 45 per cent.

External Sector

The government has decided to increase the annual limit for external commercial borrowings (ECB) by over 20 per cent to $22 billion during the current fiscal year, from the present $18 billion. Till December 2006, India Inc had raised around $3 billion in external loans, while another $ 6 to $ 7 billions have been waiting for the approval from the Reserve Bank of India . The demand for domestic credit from the banking sector has been growing at almost 30 per cent during the current fiscal year; opening up the foreign window further would make it easier for large projects to negotiate competitive rates. These include IPPs and public sector companies like IIFCL This would help domestic companies engaged in high-cost and long-term infrastructure projects to garner cheaper funds from abroad. The infrastructure sector has projected a requirement of funds worth $ 350 billion over the next five years.

Foreign direct investment into the country for the current fiscal year has expected to touch $ 12 billion, higher by 120 per cent as compared to the previous year. After including retained earnings worth of $ 3 billion The FDI inflow would be $ 15 billion for the year 2006-07. FDI inflows during April-November 2006 have stood at $ 7.3 billion with an escalation of 117 per cent over $ 3.5 billion recorded during the corresponding period of the previous year.

Information Technology

The Bangalore-based IT major Wipro plans to add 500 new employees in the United Kingdom in the next 12 months to support its operations.

NIIT Technologies posted a net profit of Rs 34.6 crore for the third quarter ended December 31, 2006, up 92 per cent on year-on-year basis. The revenues also surged by 47 per cent to Rs 231.5 crore compared with Rs 157.4 crore during the period under review.

Telecom

Mobile number portability (MNP), which allows users to change the operator without giving up the mobile number, could be in place before the end of the year. DoT is planning to implement MNP, which will give flexibility to mobile users to change their operators, in case there is no consensus on the issue. While consumer groups have been demanding MNP, cellular operators have been blocking it on the grounds that the market is not mature enough. The TRAI had earlier submitted its recommendations to implement MNP by April 2007. According to research conducted by market analysts, the fear of having to change the mobile number is the biggest reason for subscribers not changing their operator despite poor quality of service. The telecom regulator had also pointed out that MNP would increase the level of competition in the mobile segment, which would improve the quality of service. In fact, mobile operators are not against the introduction of MNP, but they consider the timing is not right to implement MNP as the tele-density target is yet to be achieved. The market is not mature enough for MNP and its introduction now will be detrimental to the industry. Countries that have implemented MNP have done so after reaching certain levels of coverage.

*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.

LIST OF WEEKLY THEMES

We will be grateful if you could kindly send us your feed back at epwrf@vsnl.com