Growth in broad money (M₃), year-on-year (y-o-y), was 18.4 per cent at end-March, 2009 as compared with 21.2 per cent a year ago, reflecting deceleration in the expansion of bank credit and capital inflows. Aggregate deposits of banks, y-o-y, was 18.8 per cent at end-March 2009 as compared with 21.7 per cent a year ago. Non-food credit growth (y-o-y) of SCBs to the commercial sector remained strong up to October 2008 on the backdrop of drying up of other sources of funds to industry but witnessed sustained deceleration thereafter. Non-food credit by SCBs was moderated to 17.5 per cent, y-o-y, at end-March 2009 as compared with 23.0 per cent a year ago. The contractionary impact of decline in net foreign exchange assets on reserve money and domestic liquidity was offset by expansion through open market operations (OMOs), unwinding of MSS and other measures to augment rupee liquidity.  Adjusted for the first round effect of the changes in CRR, reserve money growth (y-o-y) as on March 31, 2009 was lower at 19.0 per cent as compared with 25.3 per cent a year ago.

The global financial turmoil has  partially influenced credit movements in  the banking sector during  the third quarter of 2008. Many advanced economies are experiencing recessionary conditions and liquidity crunch is one of the critical factors that is affecting the several economies including India .

Growth in global  economies is weakening and several developed economies witnessing below zero percent rate of growth. The financial crisis seems to have entered a serious phase since September 2008 which has severely impaired confidence in global financial institutions and banking system all over the world. According to the World Economic Outlook Update by the International Monetary Fund (IMF) in November 2008, prospects for global growth have deteriorated as financial sector  witnessed heavy losses and producer and consumer confidence have fallen to the lowest ever levels. Consequently, world output is projected to decelerate to 3.7 per cent in 2008 and further to 2.2 per cent in 2009.

The public sector banks (PSBs) maintained its dominance in the banking system. As on March 31, 2008, PSBs accounted for 69.9 per cent of the aggregate assets and 72.7 per cent of the aggregate advances of the Scheduled Commercial Banking (SCB) system. One of the important feature of the reform of the public sector banks was the course of their financial restructuring.

According to the Reserve Bank of India’s (RBI), August bulletin, the Indian banking sector’s Reserve Money stood at US$ 214.53 billion and credit was estimated at US$ 543.87 billion, till July 4, 2008.

Aggregate bank deposits as on November 5, 2008 stand at US$ 716.76 billion. On a financial year basis, aggregate deposits went up by US$ 23.67 billion (3.5 per cent) during 2008-09, till July 4, 2008. The incremental non-food credit-deposit ratio increased to 82.4 per cent till July 2008, from 68.8 per cent a year ago. Earlier, aggregate demand deposits had increased to US$ 112.10 billion from US$ 97.75 billion till July 4, 2007.

Commercial banks’ investment in statutory liquidity ratio (SLR) eligible securities increased by US$ 9.31 billion up to July 4, 2008 as against an increase of US$ 12.26 billion in the corresponding period of 2007–08.

Aggregate deposits of the scheduled commercial banks (SCBs) reached US$ 132.74 billion till July 2008, as against US$ 120.78 billion in July 2007, and the year-on-year increase in aggregate deposits of SCBs stood at US$ 132.71 billion. Simultaneously, loans and advances of SCBs touched US$ 1.23 billion.

The credit extended by Indian banking sector rose 25.3 per cent at end of May 2008, with the outstanding credit estimated at US$ 499.61 billion.

Financial performance of SCBs during 2007-08 was influenced by hardening of lending rates and deposit rates. The net interest income of banks in relation to total assets declined during the year. However, non-interest income of banks increased which vindicates their efforts to diversify their sources of income.  Another positive feature is that as  the operating expenses (in relation to assets) declined, banks were able to maintain their operating profits in relation to total assets. Provisions and contingencies made by banks as percentage of assets were marginally lower than those in the previous year. As a result, return on assets (RoA) of SCBs showed a moderate improvement during the year. However, return on equity (RoE) declined, reflecting mainly the impact of increase in capital base as banks raised resources from capital market during the year and strengthened reserves and surplus.

Report on Trend and Progress of Banking in India , 2007-08 by the RBI, observes that foreign banks operating in India and Indian banks with presence abroad, migrated to the Basel II framework with effect from March 31, 2008. All other scheduled commercial banks (except regional rural banks and local area banks) are expected to migrate to the Revised Framework not later than by March 31, 2009. As noted in the Report, the full implementation of the Basel II framework, even under the basic/standardised approaches, would remain a major challenge for some time to come, for both the banks and the Reserve Bank. At the banks’ level, the implementation would require, inter alia, upgradation of the bank-wide information system through better branch-connectivity, which would entail cost and may also raise some IT-security issues. The implementation of Basel II also raises several issues relating to development of human resource skills and database management. Banks would require higher amount of capital under the Basel II framework. They would, therefore, need to explore various capital raising options.