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Domestic rating agency ICRA on Monday said gross non-performing assets (NPAs) in the system might jump to 5.9 per cent this financial year from 4.4 per cent in FY15, despite economic growth because of lagged recognition of bad assets, which has resulted 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 per cent by March 2016, as against 4.4 per cent 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 per cent of restructured assets have already slipped into NPAs. Now, we are increasing our estimate of such slippage to 35-40 per cent from the earlier 30-35 per cent," 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 profitability in the banking sector, especially at state-run lenders, will be under pressure if they are forced to pass the rate cuts by RBI to their lending rates.
State-run banks carry more long-tenor deposits compared with private sector peers and it takes longer - up to 18 months - for the cost of funds to be repriced, Batra said, warning such pressure might 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.
Batra said the State Bank group's capital adequacies are better than the other 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 one per cent, ICRA said.
A stress-test assuming 40 per cent of the restructured assets slipping into NPAs and a recovery of 30 per cent revealed state-run banks will have to provide for Rs 1.5 lakh crore, which can witness 30 per cent of their net worth getting wiped out, and the capital adequacy ratios falling to six per cent, which is lower than the mandatory seven per cent.
The Basel-III compliance and an estimated credit growth of up to 12.5 per cent means banks would require up to Rs 1 lakh crore in capital infusions in FY16, she said, adding the difficulties in raising resources through the additional tier 1 (AT-1) instrument is a concern.
Terming it a "vicious cycle", she said two-thirds of state-run banks could get affected due to the capital problem.
The government, which has maintained its capital infusion budget for the financial year, will have to look at alternatives like compensating the banks for rate cuts by getting interest on their cash reserve ratio or defer its policy of supporting only well-performing banks, Batra said.
She expects domestic deposits to grow by 11.5-13 per cent in FY16.
