Bank deposits, cash in circulation surge in 1H20, credit offtake takes a beating

The net mutual fund aggregate assets under management (AUM) across different types saw an accretion of Rs 127 billion during June 2020.

Even though some amount of risk aversion was being witnessed in the market earlier, the credit offtake has taken a severe beating with the onset of COVID-19, resulting in sustained, excess system liquidity. As a result, short-term yields have softened across instruments and rating levels, according to India Ratings and Research’s credit market tracker.

Cash in circulation and bank deposits steeply increased in 1H20 compared to 1H19, whereas bank credit dropped. The Reserve Bank of India’s conscious steps to reduce the repo rate have also lowered the marginal cost of fund-based lending rate across banks. However, the transmission of rate cut has been uneven among private and public sector banks.

Ind-Ra believes that it will be imperative for banks to expand balance sheets and simultaneously revive credit offtake, rather than focusing only on asset quality. The latter would be a critical factor to watch out for from 2QFY21 when the loan moratorium ends.

During June 2020, foreign portfolio investments witnessed the sharpest rebound with equity investments of Rs 218 billion, highest of 2020 till date and up 50% mom. The investments were primarily driven by two reasons.

Firstly, the gradual unlock of the economy and resumption of activity has provided some comfort at least from an economic point of view, and secondly, the excessive liquidity in developed markets due to the huge liquidity stimulus provided by central banks has given an impetus to foreign investors to invest in emerging economies. However, at the same time, foreign debt investments saw marginal sell-off of Rs 15 billion which was substantially lower than the Rs 230 billion sell-off of May 2020. The softening of yields led to price appreciation partially explaining the arrest of the sell-off.

The net mutual fund aggregate assets under management (AUM) across different types saw an accretion of Rs 127 billion during June 2020. The liquid funds AUM saw a correction of Rs 263 billion while the AUMs of corporate and short-term funds increased by Rs 182 billion and Rs 149 billion, respectively. The moderate correction in liquid funds is largely to do with the quarter end.

Commercial paper (CP) issuances have increased since March 2020, while corporate deposits (CDs) have not been issued majorly due to the excessive liquidity in the banking system. The subsequent rate cuts and liquidity infusion through various modes by the central bank have led to increased liquidity in the system. Hence, the total outstanding CD amount contracted 13% mom during June 2020 and the fresh CD issuances have remained low.

At the same time, CP issuances during June 2020 remained strong, driven by public and private financial institutions and corporates. In terms of yields, CP as well as CD issuances have witnessed a drop, majorly on account of fallen interest rates and improved liquidity.

CP issued by non-banking finance companies (NBFCs) and housing finance companies has improved in June 2020 with the major issuances happening from AAA rated NBFCs. Furthermore, NBFCs’ CP yields have eased whereas the corporates’ CP yield has remained flat compared to May 2020.