Mumbai: Domestic rating agency ICRA today said gross NPAs in the system may jump up to 5.9 percent this fiscal from 4.4 percent despite economic growth because of lagged recognition of bad assets which is resulting in slippage of more restructured accounts into dud loans.
"Reported gross NPAs will increase in FY16 with withdrawal of regulatory forbearance for restructured advances from FY16 to 5.3-5.9 percent by March 2016 as against 4.4 percent as in March 2015," the agency said in a note.
The rising NPA estimate for FY16 is primarily driven by a greater proportion of assets restructured in the past slipping into NPAs again, ICRA's senior vice-president Vibha Batra told reporters in a conference call.
"What we are experiencing is a lag in recognition of asset quality stress. Around 25-30 percent of restructured assets have already slipped into NPAs, now we are increasing our estimate of such slippage to 35-40 percent from the earlier 30-35 percent," she said.
The system of asset recasts has been discontinued by RBI, starting April 1, but banks continue to carry loans restructured in the past.
ICRA also feels that the profitability in the banking sector, especially state-run banks, will be under pressure if they are forced to pass the rate cuts by RBI to their lending rates by the government.
The state-run banks carry more long tenor deposits compared to their private sector peers and it takes longer, as long as up to 18 months, for the cost of funds to be repriced, she said, warning such pressure may be detrimental to profits.
The asset quality woes coupled with the low credit growth, which can be partly blamed on the government's shift to supporting only well-performing banks, will put the margins under more pressure, she said, without giving a level.
ICRA's senior vice-president Vibha Batra said State Bank group's capital adequacies are better than rest of the state-run banks, and also warned of poor net-worth to NPA ratios which may affect the banks.
Pressure on profitability will not bode well for the system, considering that last year, the system's profit growth stood at a paltry 1 percent, ICRA said.
A stress-test assuming 40 percent of the restructured assets slipping into NPAs and a recovery of 30 percent revealed that the state-run banks will have to provide for Rs 1.5 trillion, which can witness 30 percent of their net-worth getting wiped out, and the capital adequacy ratios falling to 6 percent, which is lower than the mandatory 7 percent.
The Basel-III compliance and an estimated credit growth of up to 12.5 percent means the banks would require up to Rs 1 trillion in capital infusions in FY16, she said, adding that the difficulties in raising resources through the additional tier 1 (AT-1) instrument is a concern.
Terming it a "vicious cycle", she said over two-thirds of the state-run banks may get affected due to capital problem.
The government, which has maintained its capital infusion budget for the fiscal, will have to look at alternatives like compensating the banks for rate cuts by getting interest on CRR or also defer its policy of supporting only well performing banks, Batra said.
She expects the domestic deposits to grow in the range of 11.5-13 percent in FY16.
