Mumbai: The banking sector it seems is heading towards troubled days with credit offtake set to miss the target, while the bad assets are likely to cross Rs 2 trillion or about 3.8 percent of the total asset book, says a report by rating agency ICRA.
"While credit growth is pegged at 14.5-16.5 percent this fiscal, as against 17 percent last year, the gross non-performing assets (gross NPAs) are likely to cross Rs 2 trillion and reach 3.6-3.8 percent of gross advances by the end of the fiscal, up from 2.8 percent last fiscal end," says an ICRA report 'Banking sector: Concerns on asset quality vitiate' released here today.
The report further warned that standard restructured advances may move up to Rs 3.7-4.2 trillion or a whopping 6.5-7.5 percent of advances by the end of the fiscal as against Rs 2.3 trillion as on March 31, 2012.
It also says as much as 40-50 percent of the banking sector exposure to power sector may need to be restructured.
It suggested that since the state-run banks have the higher percentage of NPAs, consistent equity infusion by the government to the tune of Rs 16,000-18,000 crore every year for the next six years could help them meet the Basel III capital requirement, provided they are able to mop up the balance equity from the capital markets.
Incremental credit provisions (in relation to average advances) have increased from 0.96 percent in 2010-11 to 1.1 percent in the first quarter of the current fiscal, says the report.
Similarly, the uncovered NPAs or net NPAs, despite the higher credit provisioning, increased from 1.1 percent at end March 2011 to 1.5 percent at end June 2012, leading to an increase in net NPAs in relation to net worth from 10.5 percent at the end of March 2011 to 14.4 percent at the end of June 2012, says the report.
However, despite the decline, the profitability as well as the solvency ratios have not reached alarming levels yet, although the ability of the banking system to absorb incremental stress has declined, the report notes.
Warning that the banks' asset quality may continue to slip, the report says overall, the credit profiles of borrowers could weaken in 2012-13.
This is because of factors like high counter-party risks, structurally weak contracts and concerns over fuel linkages in the power sector, lacklustre capital markets and moderation in demand.
It could also weaken because of compression of operating profitability due to cost pressures and inability of companies to pass on the higher costs in a scenario of increasing competitive intensity, forex losses, higher interest rates and project implementation related delays among others.
"The incremental stress on asset quality could be more pronounced than the weakness in the credit profiles of companies as the current asset quality numbers possibly do not reflect the actual stress in the system," it said.
Noting that the gross NPA percentage for the industry segment is only 2, it says the restructured advances are at 8 percent and some of these restructured accounts may slip into NPAs.
The NPA percentage in the infrastructure sector (accounts for around 14 percent of domestic credit as of June 2012) was only 0.6 percent as of March 31, 2012.
On credit growth, the report said it expects the annualised demand for credit to moderate to 14.5-16.5 percent, while it sees deposits to grow at 13.5-15 percent, which could support credit growth of just 12.5-14.5 percent.