Asset quality for banks is expected to worsen in the second half of FY14 due to the weak macro-environment and a sharp depreciation in the rupee, warned ratings agency Icra in a note on Thursday.
The agency said gross non-performing assets of public sector banks (PSBs) are expected to increase by 60 basis points (bps) to 4.8-5% by the end of March 31, 2014, from the existing 4.2% at the end of June 30, 2013. As a result, gross NPAs for the entire banking system may rise to about 4.2-4.4% from 3.8% at the end of June quarter.
“Gross NPAs will be linked to the banks’ ability to reduce slippages and improve recoveries from Q1, 2014 levels. In Q1, FY14, PSBs’ annualised slippages increased to 4.2% from 2.9% in Q4, FY13, and 2.7% in Q1, FY13, while recoveries and upgradations dropped to 28% of opening gross NPAs from 35% in fiscal 2013. If these remain at Q1, 2014 levels, gross NPAs could increase to upwards of 5%," analysts at Icra wrote in a statement.
The worsening macro-environment could hit private banks as well, which so far have kept their gross NPA levels at 2% as on June 30. Icra says gross NPAs for private banks could rise to 3% by the fiscal end.
The report added the cost of funds for the banking system has already risen due to a raft of measures taken by the Reserve Bank of India to arrest the fall in rupee.