Directors' Report
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Directors’ Report I. ECONOMIC BACKDROP AND BANKING ENVIRONMENT GLOBAL ECONOMIC The global trade slowed down to 2.2% in 2016 As a result of very good rainfall during owing to sluggish investment and inventory monsoon 2016 and various policy initiatives SCENARIO adjustment. However, it is likely to benefit taken by the Government, the country has from expected increase in global demand, Global growth remained stagnant at 3.1%. witnessed record foodgrain production in albeit increasing protectionist policies remain On the global level, while the advanced FY2017. As per Third Advance Estimates for a matter of concern. The overall world GDP is economies’ performance eased modestly in FY2017, total foodgrain production in the expected to grow by 3.5% in 2017. However, 2016 when compared to 2015, the emerging country is estimated at 273.38 million tonnes, deepening geo-political tensions in the market and developing economies performed which is higher by 8.34 million tonnes than Middle East and North Africa region, faster somewhat better. The US experienced a the previous record foodgrain production than expected Fed rate hike and increase lower GDP growth since 2011, thereby, of 265.04 million tonnes achieved during in protectionism policies by the advanced acting as a drag on the overall advanced FY2014 and significantly higher by 21.81 economies are the key risks that can put economies’ growth. UK slowed down against million tonnes than the last year’s foodgrain downward pressure on global economic the backdrop of weaker net exports. Euro production. activity. Area as a whole, however, registered a tad higher growth in 2016 when compared to Both Wholesale Price Index (WPI) and Another aspect that influences global growth 2015. Meanwhile, higher capital expenditure Consumer Price Index (CPI) inflation have is crude oil price, which has plummeted in enabled Russia to come out of recession in remained under control throughout FY2017. recent weeks to go below $50 per barrel. The Q4 2016, thereby pulling up overall growth CPI inflation declined significantly from a sharp fall is driven by the market’s deeper of emerging and developing countries (4.1% high of 9.9% in FY2013 to 4.5% in FY2017. The worry that OPEC’s steps of a production cut in 2016). inflation trajectory will remain in the range of may worsen structural imbalances. OPEC and 4-5% for the next 2 years with the possibility other major producers had been enjoying Despite some headwinds, global economy of a downward bias, thanks to Government higher prices since agreeing in November has been recovering in 2017, with initiatives, adoption of inflation targeting to slash production, a strategy designed to performance improving specifically amongst framework by RBI and constitution of MPC. rid global markets of excess supply. Going the advanced countries. Moreover, economic forward, it is expected that dynamics of performance of Euro area is also showing Based on new base year (2011-12), Index crude oil price will be driven by decision of an uptick with various indicators, including of Industrial Production (IIP) grew by 5.0% Saudi Arabia and other OPEC members to unemployment rate and factory output in FY2017 compared to 3.4% in FY2016, implement production cut for at least 12-18 reflecting the improving dynamics this year. hence defying the negative impact of months to reduce the inventory glut. Activity in Japan has also surprised on the demonetisation. The manufacturing sector, upside with pick-up in industrial output and which has been the most volatile, grew by exports. Though the US GDP growth eased INDIA’S ECONOMIC 4.9% in FY2017 as against 3.0% growth in in Q1 2017, the good thing is that a possible FY2016. Mining and Electricity grew by 5.3% fiscal stimulus is expected to provide a push SCENARIO and 5.8%, respectively in FY2017. to economic growth. After witnessing demonetisation in FY2017, The year-wise number of investment the Indian economy is going to see another proposals (greenfield as well as brownfield) Among the emerging and developing world, major reform in the form of implementation China continues to grow moderately with on a calendar year basis as depicted under of GST in FY2018. India’s GVA growth, which IEMs (Industrial Entrepreneurs Memorandum persistent support from the authorities. is expected to expand by 6.7% in FY2017, is However, recently Moody’s Investor’s Service excluding Direct Industrial Licenses) grew set to increase in the range of 7.4% in FY2018 from 1,909 in 2015 to 2,256 in 2016 - a downgraded China to A1 from Aa3 and (RBI estimates) due to accelerated pace changed its outlook to stable from negative. growth of 18%. From January-March 2017 the of remonetisation, stepping up of capital number of investment proposals was 557 as The rating agency attributed this decision expenditure, boosting of the rural economy, to expectations that China’s economy-wide against 543 in January-March 2016. In value demand for affordable housing, a normal terms, the proposed investments (excluding leverage would increase further over the monsoon and roll-out of GST by July 2017. coming years, planned reform program Direct Industrial Licenses) for calendar year would likely slow down, but not prevent the 2016 were `4,10,422 crore (`3,07,357 crore Indian Meteorological Department (IMD) has in 2015) – depicting a growth of more than rise in leverage, and sustained policy stimulus forecasted that this year monsoon would would cause rising debt across the economy. 33%. Key sectors which attracted investments be “Normal” or around 96% of Long Period include Electrical Equipment, Transportation, Average (LPA) with an error of ± 5% and with Economic activity in India is expected Metallurgical industries, Chemicals (except a fair distribution of rainfall across major parts Fertilisers), Cement and Textiles. to recover past the slowdown due to of country. If the forecast holds, it will boost demonetisation. rural demand and also alleviate rural distress. 32 State Bank of India | Annual Report 2016-17 DIRECTOR REPORT On the external front, the current account last 2 years, banks have given Mudra loans to will enable the bank to command better terms deficit (CAD) has been narrowing down 7.46 crore MSME units. Thus, with the thrust in both international and domestic markets. progressively from 1.7% of GDP in FY2014 of the Government and efforts by banks, The added branch network, customer base to 1.1% in FY2016 and is expected to Mudra loans now account for around 2% of and staff strength will help it expand reach improve further. The contraction in the CAD the ASCB loan portfolio. and enable the bank to rationalise resources was primarily on account of a lower trade and redundancies across the board. The deficit brought about by a larger decline in In the post demonetisation period (11 Bank’s endeavour will be to optimise costs merchandise imports relative to exports. November 2016 to 31 March 2017), and maximise revenues through the merger India’s export growth, which was in negative aggregate deposits have increased by `7.4 synergies, leading to significant cost savings territory in the first half of FY2017, rebounded lakh crore, while credit off take during the and reduction in cost-to-income ratio. significantly in the second half and recorded a same period has increased by `5.5 lakh crore. growth of 27.6% in the last month of FY2017. The huge inflow of deposits has pushed the Meanwhile, under the Pradhan Mantri Jan Imports also indicated a similar trend. share of CASA deposits in aggregate deposits Dhan Yojna (PMJDY), banks have opened 28.6 by around 4 percentage points relative to crore of accounts with `64,365 crore deposits the pre-demonetisation period. As the limits till 17 May 2017. In FY2017 alone, banks have BANKING ENVIRONMENT on withdrawals have been removed, people opened 6.7 crore Jan-Dhan accounts, out of Since the global financial crisis (GFC), have started withdrawing their deposited which 2.6 crore accounts were opened in the leading Asia Pacific Region (APR) banks have money gradually. post demonetisation period. On a positive outperformed the global banking sector. note, zero balance accounts under PMJDY The region is already witnessing new types Following the surfeit of liquidity and low have been continuously declining from 45% of competitors from the rapidly-developing credit growth, SBI has taken the lead (and in September 2015 to 24% in March 2017. Fintech sector and mega banks rising across followed by other banks) by slashing the the region (the recent SBI merger) enabling MCLR rate by 90 bps to 8.0% on 01 Jan 2017. Recently, RBI released a discussion paper on banks to operate more easily across borders. Following SBI, a number of public and private a new category of banks - wholesale and sector banks have reduced their MCLR in the long-term finance banks, which will fund Meanwhile, in FY2017, Indian banks range of 10-85 bps. large projects. These banks will be focusing remained in the limelight, initially due to the primarily on lending to infrastructure sector lingering asset quality issues and thereafter The process of demonetisation has opened and small, medium & corporate businesses. due to demonetisation. In H1 FY2017 for All up huge potential for digital channels. There They will also mobilise liquidity for banks Scheduled Commercial Banks (ASCB), both has been a significant jump in transactions and financial institutions directly originating deposits and advances growth remained in all digital modes of payments like PoS, priority sector assets, through securitization subdued and were moving in the range of m-wallets, mobile banking, IMPS and UPI. of such assets and actively dealing in them as 8-11%.