Asset quality woes for Indian banks to continue in FY’18 as well: Icra

MUMBAI: The outlook on the asset quality of the Indian banking sector seems to be weak even as the fresh non-performing asset (NPA) generation rate continues moderate, according to ratings firm Icra. Annualised fresh NPA generation declined to 4.1% during October-December’16 quarter compared with 10.7% during January-March’16 quarter.

The fresh additions to gross NPAs during the third quarter of FY’17 was lower at Rs 26400 crore as compared to Rs 1.36 lakh crore during the nine month period of FY’17, partly aided by higher write-offs during the last quarter, Icra said in a report.

With asset quality pressures, banks, especially the weaker public sector banks (PSBs) have been reporting a continuous slow down in their net interest income (NII) over the five consecutive quarters of Q3 of FY’16 to Q3FY’17 mainly on account of slower credit growth, reversal of interest income recognised on accrual basis on NPA accounts and increase in NPA levels resulting in decline in earning assets.

“Some of the PSBs that have weak capital position will face a vicious cycle of inability to grow the advances and the NII, because of capital constraints, while the operating expenses continue to grow. This will lead to further weakening of profitability and pressure on internal capital generation and hence further weakening of the capital position” said Karthik Srinivasan, Senior Vice President and Group head – Financial Sector Ratings , Icra. “ The ability to control the operating expenses as these weaker banks face the challenge of growing advances and NII will be critical for their sustainability."