Banks' non-performing assets to triple: Crisil

The slowdown in the economy and aging of loans will deteriorate banks' asset in the next two years, a report from Crisil Rating agency said. This will be driven by delinquency in the corporate loans.

Crisil projects that, by March-end 2011, the sector's gross non-performing assets (NPAs) will increase to around five per cent of its advances, from 2.3 per cent at March-end 2008.

In absolute terms this will mean tripling of NPAs to Rs 1,90,000 crore.

Banking sector advances have grown roughly four-fold over the past seven years, to an estimated Rs 27,70,000 crore.

But the rating agency believes that the banking sector's strong capitalisation will allow it to comfortably absorb the effect of the increased NPAs.

Raman Uberoi, senior director, Crisil Ratings, said: "The increase in NPAs will be driven by delinquencies in corporate loans; this asset class accounts for about 56 per cent of banks' advances."

The gross NPA ratio in this segment is projected to more than double by March 2011, to around 4.1 per cent, from 1.6 per cent as on March 31, 2008.

"The deterioration in the asset quality of corporate loans will result from the increasing intensity of the demand slowdown, a lack of access to funding at reasonable rates, movements in foreign exchange rates, and the lengthening working capital cycle. The effect of these factors on loans made to small and medium enterprises will be severe," Uberoi said.

In the retail loan book, a combination of dilution in underwriting standards in the recent past, and the aging of loans in the portfolio after a period of rapid growth, will drive delinquencies higher.

The gross NPA ratio in the retail portfolio, which constitutes more than 20 per cent of banks' total advances, is expected to increase to 4.7 per cent by March 31, 2011, from 3.2 per cent as on March 31, 2008.

However, the rating agency believe that banks are strongly capitalised, cushioning the impact of higher NPAs. The capital coverage for NPAs has increased sharply over the past ten years. The ratio of net worth to net NPAs was 12.8 times as of end-March 2008, against 2.2 times as of March-end 1998.

Tarun Bhatia, head, Crisil Ratings, said: "Given the increase in banks' net worth over the past 10 years, and reduction in their NPAs, capital jump in NPAs, we project the ratio of net worth to net NPAs at five times as on March 31, 2011. This provides sufficient coverage for losses that might arise out of these NPAs."