Mumbai: Indian banks’ non-performing assets (NPAs) are likely to triple over the next two years, but the sector’s strong capitalization will allow it to comfortably absorb the effect of the increase, rating agency Crisil Ltd, the India arm of Standard and Poor’s, said in a report.
“The increase in NPAs will be driven by delinquencies in corporate loans; this asset class accounts for about 56% of banks’ advances,” said Raman Uberoi, Crisil’s senior director.
Banking sector advances have grown about fourfold over the past seven years to an estimated Rs27.7 trillion. Crisil projects that, by end-March 2011, the sector’s gross NPAs will increase to around 5% of its advances. This will mean a tripling of NPAs to Rs1.9 trillion, Crisil added.
Crisil blamed the “increasing intensity of the demand slowdown, lack of access to funding at reasonable rates, movements in foreign exchange rates, and the lengthening working capital cycle” for the expected deterioration in the asset quality of corporate loans.
“The effect of these factors on loans made to small and medium enterprises will be severe,” Uberoi said.
The rising delinquency would pull down net profit growth rate from 30-40% last year to an average rate of 10-12% in the next two years, Tarun Bhatia, head of Crisil Ratings, said.
However, Crisil noted that the capital coverage for NPAs has increased sharply over the past 10 years; the ratio of net worth to net NPAs was 12.8 times as of end-March 2008, against 2.2 times as of end-March 1998.
“Therefore, even with the expected 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,” said Bhatia.
PTI contributed to this story.