The report also warned that PSBs' fresh NPA generation rate may remain at elevated levels in the short-term.
"We expect public sector banks' (PSBs) gross NPAs to remain at 4.4-4.7 per cent by March 2015 as against 4.4 per cent as on March 2014," Icra Senior Vice-President and Co-Head (Financial Sector) Vibha Batra told reporters in a webinar here today.
For the banking system as a whole, gross NPAs declined to 3.9 per cent in FY'14 from 4.1 per cent as of December 2013, following 30 basis points decline in PSBs gross NPAs to 4.4 per cent.
As of March 2014-end, tier-I capital of PSBs stood at around 8.6 per cent as against the requirement of 6.5 per cent, while that of private sector banks was close to double the requirement at 12.8 per cent.
The rating agency said economic revival will hold the key for reduction in fresh NPA generation rate.
It expects a lag of one to two quarters to reflect the impact of economic recovery on fresh NPA generation.
"Going forward, PSBs credit provisioning could decline marginally provided they are able to control fresh NPA generation rate as well as fresh flow of restructuring," she said.
The rating agency said the provisioning required for unhedged forex exposure and a gradual increase in arrangements for existing restructured advances could neutralise the reduction in credit provisioning.
Batra said the 30-40 basis points decline in yields on government securities in last few months along with a recent surge in equity markets could offer a marginally higher treasury income to banks in FY'15 as compared to last year.
"Thus marginal increase in profitability and 13-15 per cent expansion in the balance sheet may translate into 15-35 per cent growth in net profit for PSBs in FY'15 as against 27 per cent last fiscal," she said.
Despite such a significant increase in profits, the return on equity for PSBs may remain lower at 9-11 per cent, less than private sector banks', which is expected to be at 16-17 per cent, she added.
Icra said banks will need to raise capital worth Rs 1.8-2 trillion over the next two financial years. "Out of this, 45-50 per cent may be issued in the form of additional tier 1, 35-40 per cent through tier II and balance through common equity," the report said.
The agency, however, said if there are no seekers for additional tier 1 capital instruments, banks may need to mop up Rs 1-1.3 trillion common equity capital over the next two years.