Rating agency Icra sees NPAs soaring by up to 150 bps to 5.9% this fiscal

MUMBAI: The worse may still not be over for the banking sector. Non-performing loans of Indian banks may remain high at 9.5 to 10.5% in FY’16 if restructured advances are also factored, according to ratings firm Icra. RBI’s flexible restructuring norms for infrastructure and core industry loans and deleveraging by the firms hold the key the ratings firm rate. The banking sector is expected to be u

Several companies in ‘infrastructure and core industries’ are facing structural issues and are overleveraged. “While, RBI’s norm for flexible structuring of existing long-term project loans to infrastructure and core industries may restrict the formation of NPAs assets to an extent, resolution of structural issues and deleveraging of these corporate hold the key for actual reduction in stress on credit profile of such issuers.” Said Icra in a report. “Therefore Gross NPA% + restructured advances % may remain at 9.5-10.5%. However, within stressed assets, Gross NPA% may increase due to changes in regulatory classification.”

The report noted that the pace of fresh stressed asset formation has declined marginally for Indian banks. This could be attributed to higher economic activity, lower inflation, falling interest rates, and removal of some impediments in the infrastructure sector.

While at the same time the flow of credit remains under pressure. The credit profiles of bank corporate borrowers could see lower stress in FY16 as economic activity picks up, interest rates reduce and inflationary pressures are lower, it said.



Decline in stressed asset formation could help the banks in improving their credit profiles over longer term provided structural issues are resolved and corporates make serious efforts to deleverage. Over the next 12 months, Net NPAs are expected to increase, while operating profits could remain under pressure owing to pressure on NIM and slow credit growth, leading to further slippage on this parameter for most PSBs, Icra noted.

Overall, the credit profile of private banks’ is likely to remain stable over the short term, but that of PSBs’ may see a greater divergence. Select PSBs, which are not capital constrained, may have an opportunity to protect or even improve the credit profiles, by improving earnings through a reasonable credit growth and by improving capitalization profile through external equity from the government or the capital markets.