Manufacturing slowing in September, reveals SBI Composite Index

Banks’ loan books not showing significant traction

State Bank of India on Thursday said its yearly Composite Index, which is a leading indicator of manufacturing activity in the Indian economy, for September 2016, is indicating a downward momentum and is in a ‘low growth’ phase compared to the previous month’s ‘moderate growth’ phase.

Specifically, the yearly Composite Index reading for the reporting month has come in at 50.2 (low growth), compared to the previous month’s 52.7 (moderate growth), and above the benchmark level of 50.

The Composite Index has mainly two indices — SBI Monthly Composite Index and SBI Yearly Composite Index. A consistent negative (positive) month-on-month forecast in the index will lead to negative (positive) growth rate in year-on-year index after a while.

Loan book

According to Ecowrap, a publication of the bank’s economic research department, 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 13-14 per cent credit growth, but mostly on the back of refinancing by banks on completed infrastructure projects in sectors such as power and roads where there are no risks.

“In the coming months, there may be some demand from the retail side due to festive seasons. We also believe oil companies and NBFCs may avail of credit growth in the second half of the current fiscal,” it said.

Referring to a rating round-up report for the second half of FY16, Ecowrap said the debt weighted credit ratio or the quantum of debt of firms upgraded versus downgraded was 0.2, the lowest in the last three years. This signals the trend in credit quality of corporate India. Sectors that stood out in the upgrade were in consumption-related sectors such as agricultural products, textiles, and automotive components. Poor performance by sectors in the downgrade category includes steel, electric utility, and industrial machinery.

Credit cycle to improve

According to the report, “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 de-leveraging by corporates and subsequent repayments.

“Retail credit growth continues to be strong. Additionally, about 48 per cent of the credit upgrades in H2 FY16 was due to better order book/healthy demand, improvement in profit margins and efficient management of working capital.”

With the Pay Commission arrears and revised salary of government employees implemented from August 2016, bank deposits showed sizeable growth in September (over 20 per cent of the incremental addition in the current fiscal is attributable to these developments. This will lead to increased consumer demand ahead of the festive season.

“We are pencilling in a 50-basis point rate cut by the RBI MPC, maybe as early as in the October policy,” said the report.