ICRA expects NPAs to cross 5% in FY16

ICRA expects economic growth to improve modestly to 7.6-7.8% in 2015-16 from 7.3% in 2014-15.

New Delhi: On 13th May, Rating agency ICRA said the percentage of bad loans in the banking system is expected to rise and cross 5 percent in the current fiscal.

"The removal of regulatory forbearance by RBI, however, would push up the gross non-performing asset (NPA) percentage to 5.1-5.7 percent in 2015-16 from 4.5 percent in 2014-15," ICRA said in a statement.

"While private banks' earnings are likely to remain stable over the short term, the public sector banks' earnings could remain subdued because of lower credit growth, higher income reversals (courtesy higher NPA percentage) and likely high credit costs," it said.

Many players, especially the public sector banks (PSBs), are facing challenges on capital, asset quality and profitability fronts, it added.

While higher economic activity, lower inflation, and falling interest rates could ease the stress, the extent of relief would hinge on the extent to which the problems facing the infrastructure sector as well as the steel sector are resolved, it said.

Factoring in the possibilities of a mild monsoon deficit, modest increases in minimum farm support prices and placid crude oil prices, Consumer Price Inflation should average 5.5 percent in 2015, allowing for further repo rate cuts of 50 basis points over the remainder of calendar year 2015, it added.

Commenting on the Indian economy, the rating agency said that the outlook has improved substantially, drawing on moderating inflationary pressures, rate cuts by the RBI and a comfortable current account deficit (CAD) position.

Considering the significantly higher budgetary allocations for investment spending and the current cyclical recovery, economic activity should perk up in 2015-16, it added.

Going forward, the key risks to economic growth are delayed revival in rural demand based on the expectation of a sub-par monsoon and weak export growth.

Overall, it expects economic growth to improve modestly to 7.6-7.8 percent in 2015-16 from 7.3 percent in 2014-15.

The start of monetary easing should also support consumption activity as well as provide corporates some relief in terms of interest costs, it said.

The agency expects corporate credit quality to stabilize on the back of a relatively benign macroeconomic environment and cyclical recovery in consumption-oriented industries.