Working capital utilisation by sectors specifically linked to the geo-political tensions has been impacted adversely even as continued growth in bank credit is a matter of comfort, indicating that the Indian economy is still navigating through the turmoil rather well, according to State Bank of India’s economic research department (ERD).

The sectors in which working capital utilisation has been impacted include petroleum, power, engineering and also cement (possibly because of monsoon, construction activities take a backseat), as per ERD’s ‘Ecowrap’ report.

“The good thing is that some of the consumer-facing sectors like leather, food processing did not witness a material decline in working capital utilisation. Even sectors like pharmaceuticals and new-age sectors like healthcare did witness holding on to higher working capital utilisation limits,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

Credit growth at ₹2.6-lakh crore far outstripped bank deposit growth at ₹1.04-lakh crore in the current year.

The ERD expects sectors such as infrastructure including power, renewable energy, petroleum, mining, road, NBFCs, cement, aviation, electric vehicles, electronics, commercial real estate, and food processing, among others, to drive credit growth in the coming quarters.

RBI’s recent measures on External Commercial Borrowing/Foreign Portfolio Investment inflows in the debt segment are a welcome step in widening the market, the report said.

Incremental credit to MSME on upswing

The report noted that incremental credit to Micro, Small and Medium Enterprises (MSMEs) since March 2020 has increased.

Around 74 per cent of the incremental credit is purely because of the credit guarantee scheme, and the remaining 26 per cent is because of other schemes including the definitional change in the MSME sector. In terms of overall credit growth, the ECLG (Emergency Credit Line Guarantee Scheme) has contributed 15 per cent of the expansion.

Banks judicious in credit

The ERD opined that banks continue to be judicious in terms of credit disbursements. A decline in risk-weighted assets (RWA) continues, from around 65 per cent in June 2019 to below 58 per cent as on March 2022, indicating that banks are still careful about the risk profile of borrowers in an environment characterised by considerable uncertainty.

Corporate bonds

Ghosh observed that though the spread between “AAA” corporate bonds and 10-year risk-free Government Security (G-Sec) rates started moving upward since April 2022, still it is significantly less than half of the average spread at the pre- pandemic level in FY20.

The average spread of a AAA 10-year paper was 117 basis points (bps) during pre-pandemic levels over similar tenor G-Sec, which is now only 36 bps. “This indicates that risk pricing of corporate loans has not moved up in tandem. Market sources point out that some of the entities are not completely factoring the inherent credit risk in their pricing,” Ghosh said.

For example, 5-year loans are being priced at even lower than 6 per cent, linking with Repo/Treasury Bill rates. The 10-year G-Sec is currently trading at 7.3 per cent. Ghosh observed that tenor premium apart, the practice may create a material risk with regards to the sustainability of such rates and long-term effects of this practice on the ecosystem in a rising interest rate scenario.

Markets anticipating recession

“Global economy continues to be characterised by significant volatility. On average, energy, base metals, precious metals and agricultural prices are now down 25 per cent from 52-week highs as markets are anticipating a global slowdown morphing into a full-blown global recession,” Ghosh said.

However, it is not clear whether such a decline is the result of synchronised global rate actions or genuine fears of a recession looming large. In India, such global developments could have a direct bearing on the inflation trajectory in the second half of the current fiscal, according to the SBI report.