The CII – IBA Financial Conditions Index for Q4 (January-March) FY2016-17 recorded a drop below the 50 mark owing to expectation of banks and financial institutions of deterioration in the overall financial conditions in the economy on account of worsening external financial linkages and domestic economic activity.
The reading of the Confederation of Indian Industry (CII)-Indian Banks’ Association (IBA) Financial Conditions Index for Q4 of FY 2016-17 at 48, signals that the majority of 43 respondents, including public sector banks, private sector banks, foreign banks and non-banking finance companies, have indicated a slowdown in the overall economic conditions of the country.
According to a joint CII-IBA statement, considering the significant shift in the outlook for financial conditions in the current macroeconomic scenario, the impact of the contractionary demand shock triggered by the note ban will eventually radiate from cash-intensive activities to virtually every sector of the economy.
“Since our economy is heavily dependent on cash, demonetisation has hit trade and consumption hard and the move is likely to take a toll on the country's growth and output during the current fiscal.
“The transition to a cashless economy will eventually improve savings in financial assets, which will benefit intermediaries such as banks, NBFCs, microfinance and digital money operators,” the statement said.
Overall, according to the CII-IBA Round 6 survey, there was a relative decline across all the sub-indices leading to deterioration in the Financial Conditions Index. The sub-indices include Cost of Funds Index, Funding Liquidity Index, External Financial Linkages Index, and Economic Activity Index.
Among the sub-indices, the Economic Activity Index recorded the lowest level and witnessed maximum decline, with expectations of significant deterioration.
However, the Cost of Funds Index and Funding Liquidity Index indicate an improvement, reflecting divergence in performance vis-à-vis other sub-indices.