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Asset quality for PSU banks may peak out in 1-2 yrs

High levels of stress already visible in priority sectors like agri, edu and micro enterprises, SMEs and mid-corporates

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While a significant portion of asset quality stress is already visible in public sector banks, the stress may peak out in the next one to two years, says a report by Espírito Santo Securities. According to the report high levels of stress is already visible in priority sectors like agriculture, education and micro enterprises and in small and medium enterprises and mid-corporates. However, large corporates are yet to witness non performing assets, especially in stressed sectors like power and infrastructure, which will be visible in the next two years.

“When digging deep on asset quality we find that stress from large corporates and slippages from restructured advances is yet to reflect in PSU banks gross non performing asset (GNPA) percentage numbers,” the report said.

There are a lot of similarities between the current asset quality cycle and the previous cycle (FY 02-07), in terms of the high GNPA percentage, lower GDP growth and a few stressed sectors. Since the banking sector has been strengthened in terms of an improved legal framework for recovery such as SARFAESI Act, asset reconstruction companies, the introduction of credit bureaus like CIBIL and far more stringent NPA recognition norms. Because of these structural improvements GNPA percentage may not increase as high as the FY02 level of 10.4 per cent for the system. Currently, the GNPA percentage for the banking system is at 2.9 per cent.

The private sector bank asset quality has remained stable and well below the levels during FY 02. Even after accounting for restructured advances, asset quality is well under control for private sector banks, the report added.

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