The yearly State Bank of India (SBI) Composite Index, an indicator for tracking India’s manufacturing activity, is indicating downward momentum in September 2016 and just above 50 at 50.2 (low growth), compared to last month's index of 52.7 (moderate growth), portending a decline in growth.
"We expect that the credit cycle will turn for the better in a gradual manner. The good thing is that a part of the slowdown in corporate credit growth in the current fiscal is because of deleveraging by corporates and subsequent repayments. Retail credit growth continues to be strong. Additionally, about 48% of the credit upgrades in second half of FY2016 was due to better order book and healthy demand, improvement in profit margins and efficient management of working capital," says SBI in its Ecowrap report.
The fortnightly data of all scheduled commercial banks (ASCB) indicates that credit off-take is in a single digit at 9.8% as on 2 August 2016. SBI says, the bad thing is that debt weighted credit ratio (DWCR) worsens in FY2016 (all rating agencies) - the ratio declined below 1 in FY2016 - from 1.24 to 0.79 in FY2016. Hopefully, there should be a medium term course correction, it added.
According to the report, even as year-on-year growth has improved in recent weeks, but the year till date (YTD) growth is actually showing a decline. This YTD decline is possibly attributed to repayments made by oil companies, non-banking finance companies (NBFCs) and some corporates to the banks since March 2016.
It says, "The banking sector loan book is not showing significant traction as of now, on the back of a stagnant pipeline of projects. In our view, the year is likely to see a 13-14% credit growth, but mostly on the back of refinancing by banks on completed infrastructure projects in sectors like power, roads, where there are no risks. In the coming months, there may be some demand from the retail side due to the festive season. We also believe oil companies and NBFCs may avail of credit growth in the second half current fiscal."
"Overall, demand still remains a significant laggard in the system. With the pay commission arrears implemented from August 2016, bank deposits have shown a sizeable growth in September (over 20% of the incremental addition in current fiscal is attributable to such). This will lead to increased consumer demand ahead of festive season. We are pencilling in a 50 basis points rate cut by Reserve Bank of India (RBI) in its monetary policy during the current fiscal," SBI Ecowrap report concludes.