I. Economic Backdrop and Banking Environment
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DIRECTORS’ REPORT INCLUDING MANAGEMENT DISCUSSION AND ANALYSIS I. ECONOMIC BACKDROP AND BANKING ENVIRONMENT GLOBAL ECONOMIC Global trade witnessed a sub 3% growth in 2015 for the fourth consecutive year After two successive years of deficit SCENARIO with emerging and developing countries monsoons, the prediction of above The world economy has passed suffering more than the advanced normal monsoon this year at 106% of through yet another difficult year. The economies. Going forward, the trade Long Period Average (LPA) will bring growth in advanced economies has figures will remain sluggish in 2016 cheer. There is a 94% probability that stagnated, while that in emerging and with moderate import demand from monsoon will be normal to excess the developing world has decelerated, developed world. Meanwhile, slowdown this year. It is interesting to note that leading to a slow global growth of 3.1% in China, increase in financial volatility since 1999 (when IMD predicted in 2015. The US economy continues and adverse exchange rate movements 108% rainfall) this is the highest ever to grow below potential with GDP of more vulnerable countries with rainfall projection by IMD. The spatial growth falling to 1.4% in Q4 2015 and large foreign debts may put downward distribution of monsoon will also be 1.9% for the whole year. The Euro pressure on trade dynamics. On the fair with drought-hit states also likely to Area expanded at 1.6% in 2015, again inflation front, divergent trends are receive good rainfall. North-East India driven mainly by private consumption. visible with accelerating consumer and South-East India, particularly Tamil However, economic growth in the prices in EMEs and declining prices in Nadu, may get slightly less than normal region has remained unchanged at advanced countries. rainfall. 1.6% in the last three quarters. The disappointing situation persists in 2016, As far as financial volatility is concerned, The third advance estimates of the with underperformance of the services the role of emerging markets has Ministry of Agriculture indicate that sector in the Eurozone and UK and increased with enhanced spill overs despite low reservoir levels, relatively weak overseas demand taking a toll on from emerging markets to the global warmer winter and a deficient North- German factory orders. equity prices and currency market East monsoon, Rabi foodgrains developments recently. The good thing production increased over levels a year Japan continues to stutter with economic is that after witnessing a turbulent ago and even compensated for the contraction of -1.1% in the last quarter beginning in 2016, market sentiment shortfall in Kharif output. Hence, the of 2015 (0.5% for full year 2015) despite has revived considerably in the recent total foodgrains production during FY16 active intervention of the Government. months. estimated at 252.23 million tonnes will This in turn has pressured the monetary be marginally higher over the production authorities to adopt negative interest of 252.02 million tonnes during FY15. rates in January this year. INDIA’S ECONOMIC SCENARIO For FY17, Government has set the target of 270.10 million tonnes. Meanwhile, growth in emerging market Despite all the headwinds, both domestic and external, the Indian economies (EMEs) has remained tepid Industrial output as measured by the economy remains in a sweet spot and in 2015 at 4.0% with Brazil and Russia Index of Industrial Production (IIP) grew by 7.6% in FY16 compared to 7.2% decelerating more than expected could not sustain the surge in Oct’15 in FY15 and 6.6% in FY14. On Gross amidst sluggish growth in China. The and declined after that. The decline Value Added (GVA) basis, the economy recent firming up of commodity prices in IIP during recent months is mainly grew by 7.2% in FY16 compared to 7.1% will support commodity exporting led by decline in manufacturing. in FY15 and 6.3% in FY14. This growth emerging economies, but domestic Electricity generation has remained is primarily driven by growth in services constraints and weak external demand resilient and is expected to sustain (8.9% in FY16) and industry (7.4% may put downward pressure on its performance backed by thermal growth dynamics. in FY16). 30 State Bank of India | Annual Report 2015-16 supplies, while consumer durables deposits registered a 9.9% growth in Meanwhile, under the Pradhan Mantri continue to gain. The investment FY16 (for the fortnight ended 18 March, Jan Dhan Yojna (PMJDY), banks have climate in the country has improved 2016), compared to FY15 (fortnight opened 21.51 crore of accounts so as the stock of stranded investment in ended 20 March, 2015) growth of far with `36,600 crore deposits. On a stalled projects has started to decline. 10.7%. However, in absolute amount, positive note, zero balance accounts deposits grew by `8.4 lakh crore in under PMJDY have been continuously Inflation, both Wholesale Price Index FY16 compared to `8.2 lakh crore in declining from 45% in Sep’15 to 27% in (WPI) and Consumer Price Index (CPI), FY15. The muted deposit growth may Mar’16. Further, under the Jan Surakshsa remained under control throughout FY16. be due to rise in currency circulation scheme, banks have enrolled a total of Even WPI inflation remained in negative in the system, increasing outward 12.6 crore of applicants cumulatively, territory for the entire fiscal. The average remittances and high base effect. out of which SBI alone has enrolled WPI was -2.5% for FY16 compared to 2.3 crore accounts for the year ending 2.1% for FY15. The sharp decline in Meanwhile, credit growth remained in Mar’16. Taking this initiative forward, fuel prices has led to negative WPI. CPI the range of 9-10% in H1FY16. After Government has been using the banking inflation also declined significantly to the rate cut by RBI (75 bps in total; 25 channels to disburse the subsidy 4.9% (average) in FY16 from 6.0% in & 50 bps in two tranches in Jun’15 and amounts through these accounts, by FY15. Inflation, both WPI and CPI, has Sep’15), banks also reduced their base using the Aadhaar platform. however increased in April 2016, but we rates in the range of 55-70 bps, which expect this to be transitory and seasonal. helped credit demand to pick up in H2 To further increase the penetration of touching the highest growth of 11.6% in financial services in the country, RBI On the external front, the current Feb’16. Overall, YoY credit grew at a has issued a total of 23 new banking account deficit (CAD) narrowed to $7.1 higher rate of 11.3% in FY16 (18 March, licences (2 universal banks, 11 Payment billion (1.3% of GDP) in Q3 FY16 from 2016), compared to FY15 (20 March Banks and 10 Small Finance Banks) $7.7 billion (1.5% of GDP) in Q3 FY15 2015) growth of 9.0%. The incremental in 2015, with an objective to provide and $8.7 billion (1.7% of GDP) in Q2 lending during the financial year has banking facilities to the unbanked FY16. The contraction in CAD was been mostly to the personal loan sections of the people. The 2 universal primarily on account of a lower trade segment, especially housing, and also banks have started their operation in deficit due to decline in both exports Mudra. Interestingly, in a period of one 2015 and Capital Local Area Bank and imports. For the entire fiscal, both year, with the thrust of the Government (CLAB) has launched its operations as exports and imports growth were in and efforts by banks, Mudra loans now India’s first small finance bank (SFB) in negative territory. For FY16, exports account for around 1.7% of the ASCB April 2016. Apart from CLAB, the others fell 15.8% to a five-year low of $261.1 loan portfolio. who have received RBI’s approval to billion due to fragile global demand and start SFBs are preparing to launch by low commodity prices. Imports also Liquidity conditions, which had Sep’16, much ahead of the deadline of dipped 15.3% to $379.6 billion, leaving tightened since mid-Dec’15, were Apr’17. The 11 payment banks which a trade deficit of $118.5 billion. stretched further by the larger-than- got in principle approval are now in usual accumulation of cash balances by the process of getting formal licences the Government, unusually heightened from RBI. However, reports state that 4 BANKING of these have decided not to proceed ENVIRONMENT and persistent demand for currency, a pick-up in bank credit and flatter deposit with the venture. In FY16, banking business turned out a mobilisation at this time relative to past mixed bag, due to a number of reasons Further, in line with the Government’s years. However, RBI undertook liquidity like weak economic activity, stress in digital India mission, most banks are operations to quell these pressures and certain sectors and consequent lower endeavouring to make available their supplemented normal operations with credit demand. Despite relatively products and services on the online liquidity being injected through OMOs high real interest rates, aggregate All platform. Apart from this, in a move to and variable rate repo auctions. Schedulad Commercial Bank (ASCB) a step closer towards becoming a less State Bank of India | Annual Report 2015-16 31 DIRECTORS’ REPORT cash economy, National Payments at the same time it will significantly expected to further bring down the cost Corporation of India (NPCI) with RBI improve customer experience. The of borrowing in a declining interest rate has launched the Unified Payment adoption of digital technology will scenario.