Domestic rating agency Icra today said with banks recognising large non-performing assets following RBI’s asset-quality review, gross NPA level is likely to increase to Rs 4.8-5.3 lakh crore or 6.2-6.8 per cent as of March 31.
Gross NPA level stood at Rs 4.5 lakh crore or 6 per cent as on December 31.
“As most banks are yet to fully recognise NPAs, it is likely that NPA addition will remain high in Q4 FY16 as well. While the second half of FY16 should not be taken as the base for predicting the future performance of banks, significant NPA recognition in H2, FY16 could take up the gross NPAs to 6.2-6.8 per cent by March 31,” rating agency’s group-Head (financial sector ratings) Vibha Batra said in a report.
This, along with the relatively high level of other weak assets (9-10 per cent), could lead to higher credit costs over next two-three years.
The profitability of banks could therefore remain low (return of equity of less than 10 per cent) in FY17 as well.
In the rating agency’s estimate, 70-80 per cent slippages in the third quarter were from standard assets, which points to inherent weakness in standard accounts.
As a result banks’ total stressed advances increased from 10.8 per cent in September 2015 to 11.6 per cent in December.
The report said around 15-16 per cent of the total credit in the banking industry is weak, involving NPAs, restructured advances, or other exposures to entities which are facing credit issues. This works out to Rs 11-12 lakh crore, even as only Rs 4.2 lakh crore is recognised as NPAs.
“If economic activity picks up and some of the structural issues in credit intensive sectors are addressed, it is likely that banks’ gross NPAs percentage will not increase materially from these levels till March 2019,” the agency noted.
But in a stress scenario, that is if recoveries and upgrades drop from past levels and the structural problems are not addressed, gross NPAs percentage could increase to 7.5-8.5 per cent by March 2019, it said.
The report said PSBs losses in second half are likely to be sizable in relation to Rs 25,000 crore infused by government as equity.
On an aggregated basis, PSBs reported net losses of Rs 11,400 crore in the third quarter; a similar trend is likely in the fourth quarter.
Private banks reported relatively stable profits in the third quarter with their aggregated PAT at Rs 11,300 crore against Rs 10,400 crore in Q2.
The report further said credit growth is not expected to improve substantially till the time demand in credit-intensive sectors picks up and supply-side constraints (specifically for PSBs) with regard to capital as well as weak asset quality leading to focus on recoveries are addressed.
It said the implementation of the marginal cost of funds based lending rate (MCLR) from April 1 could improve banks’ competitive position vis-a-vis capital market sources and could support banks’ credit growth to an extent.
As for segment-wise growth, retail and agricultural loans, which have grown by 16.1 and 12.7 per cent (yoy) respectively as in December 2015, are likely to be the key driver of credit growth for banks even as credit to large industries could remain muted, it said.
On capital front, Icra estimates PSBs will need to raise tier I capital of Rs 1.6-2.6 trillion during FY17-FY19 as against its earlier estimates of Rs 1.9-3.0 trillion.
“Therefore, investor appetite for PSBs common equity and AT1 is key for their ability to grow during FY18-FY19,” it added.