"We expect NPAs for the banking industry to exceed Rs 5.8 lakh crore by March 31," said S&P. Due to slow economic growth, banks are yet to see recovery on their assets quality. According to bankers, the NPA cycle will peak due to factors such as drop in the productivity of Indian companies, larger proportion of long-term loans, exposure to sectors which are cyclical in nature and aggressive lending to the agriculture sector.
"Economy has not improved and investments are not picking up. Also, interest rates have not come down to expected levels. Due to these factors, there will not be a significant drop in the current NPA levels. The stress on assets will continue for some more time to come," said a senior official of a large public sector bank.
The stress on assets is expected to continue at least for the next 12 months. "The economy has bottomed out and NPAs will peak out in the next 12-18 months," said a banker with a private sector bank. He pointed out that the economy has slowed and borrowers are not able to generate enough cash flows to repay the loans.
According to a Fitch Ratings report released on Monday, Indian banks will face sustained asset quality weakness over the next few quarters, although most banks have a reasonable buffer to withstand increased stress. Fitch expects the banking system's gross NPA ratio to reach 4.2 per cent by March 2013, up from its earlier estimate of 3.75 per cent.
Emkay Global Financial Services expects gross NPAs growth to average around 40 per cent in the next two years, compared to the 30 per cent seen during FY09-FY12. "Effectively, we do not rule out gross NPA ratio rising from the 3.1 per cent in FY12 to 4-6.5 per cent in the next 12-24 months," Dhananjay Sinha and Kashyap Jhaveri of Emkay Global Financial Services said in a report last month.
According to Sinha and Jhaveri, sustenance of high commodity prices, further weakening in fiscal conditions and extension of regulatory concession will stretch the NPA cycle, while tighter regulatory framework, correction in global commodity prices and aggressive fiscal consolidation will shorten the cycle.
However, the impact of economic slowdown is not witnessed in consumer loans, due to which even banks are in the process of growing their retail portfolios. "Banks' consumer loans continue to perform well because a slowdown in economic growth hasn't lowered India's employment rate yet. Wages are also still rising, although inflation remains high," said S&P.
Data released by the Reserve Bank of India (RBI) earlier this month showed that NPAs in the banking system were the highest in the past five years. Net NPAs rose sharply to 1.28 per cent in 2011-12 from 0.97 per cent a year ago.