We expect gross NPAs to increase by 110 bps to 4.4% of gross advances by the end of this fiscal, up from 3.3% last year. Systemic weak assets are likely to rise by 140 bps to 5.7% of gross advances by the end of this fiscal, a significant increase over last years 4.3%, said Pawan Agarwal, senior director at Crisil Ratings in the report.
The report defines weak assets as NPAs plus 30% of restructured standard assets (RSAs), excluding those of state power utilities. Crisil believes 30% of RSAs have a high chance of slipping into NPA category over the next two years.
Earlier in August, Icra had also warned that NPAs in the banking system could rise to 4.2-4.4% from 3.8% at the end of the fiscal year. The Icra report added that public sector banks are likely to be in worse shape with NPAs for them expected to increase by 60 bps to 4.8-5% by the end of March 31, 2014, from the existing 4.2%
The report from Crisil also added that credit quality for Indian corporates will also continue to remain under pressure in the near-term due to tight liquidity, high interest rates and a demand slowdown. The credit ratio, or the proportion of upgrades to downgrades, for the first half of the current fiscal ended September 30 has come in at 0.87 times, said Crisil. The ratio has stayed under 1 for the last two years. This time around, there were 478 downgrades to 417 upgrades. It added that 86% of the downgrades were due to to demand slowdown and delays in receivables.
Crisil analysis was based on 2,481 firms rated BBB- and above and the report found that a fourth of these firms were highly vulnerable to the demand slowdown and a sixth of them were vulnerable to liquidity constraints.