The significant increase in interest rates by the Reverse Bank of India (RBI) over the past 18 months will adversely impact the asset quality and profitability of India?s banks, a Crisil report says. The banks? gross non-performing assets (NPAs) ratio is expected to increase to nearly 3.0% by March 31, 2012, from 2.3% a year ago.
The pressure on asset quality is expected to arise primarily because of the weakening debt servicing ability of the corporate sector, especially the small-and-medium-enterprises (SME) segment. The banks? migration to system-based recognition of NPAs will also result in higher NPAs over the near term.
Moreover, the report says, the banks? limited ability to pass on further increases in funding costs to borrowers may result in a sharp decline in their return on assets (RoA) to below 1% in 2011- 12 for the first time in five years.The sectors with weak demand-supply scenario, intense competition and high leverage will be the most impacted. Also, sustainability of demand across industries, such as cement, automotive, construction, and textiles, will be a key monitorable for the credit quality of India?s corporate entities.
Crisil says the overall slippages to NPAs for banks are expected to increase to around 2.5 % in 2011-12 from an average of 2.1 % over the past three years. Still, Crisil believes that gross NPAs will not significantly exceed 3.0% over the medium term, because , despite some challenges, Crisil expects the Indian economy to grow at between 7.7 and 8.0 % in 2011-12.