Mumbai: Corporate loans worth around Rs2 trillion can potentially turn bad in the next 12-18 months but the overall additions to the non-performing loans category are seen trending downwards, India Ratings said in a report on Thursday.

“A meaningful proportion of mid-sized stressed corporates (1.6% of bank credit as of September 2017) continues to be standard on bank books with absolutely no form of recognition and could slip into non-performing category in the next 12-18 months," Udit Kariwala, senior analyst-financial institutions, wrote in the report.

In addition, another 1% of stressed assets could turn bad. These are mostly standard but restructured loans, and those loans whose restructuring under the central bank’s schemes may not work. Currently, the pool of corporate stressed loans stands at around Rs9.6 trillion, Kariwala said.

In its Financial Stability Report released in December, the Reserve Bank of India (RBI) said that its stress test of the banking sector showed that while non-performing assets (NPAs) may rise, the stress in the banking sector “while significant, appears to be bottoming out".

Under the central bank’s base case scenario, gross NPAs in the banking sector may rise from 10.2% of gross advances in September to 10.8% in March and further to 11.1% by September 2018.

Rise in NPAs may keep credit costs, or the percentage of provisioning against total advances, elevated for the next fiscal but they are expected to be lower than the previous year. The rating agency expects this financial year to close with a credit cost of 215 basis points (bps) for the banking sector and 180 bps in the next fiscal. A basis point is one-hundredth of a percentage point.

India Ratings said that the profit and loss of most public sector banks would be under pressure for the next few quarters because of the rise in provisions related to accounts referred for insolvency proceedings to the National Company Law Tribunal (NCLT).

The rating agency on Wednesday maintained a stable outlook on private sector banks and large public sector lenders. It also retained a negative outlook for mid and small-sized state-owned lenders despite the government’s recapitalization programme. That’s because these lenders are expected to continue to lose market share given the capital requirement related to ageing of bad loans, migration to new accounting norms from 1 April and other regulatory capital norms.

Last month, the government allocated Rs88,000 crore towards recapitalizing public sector banks.

Kariwala said that a large part of the recapitalization and the proposed capital-raising by banks is expected to go towards provisions for stressed assets.

Public sector banks need Rs1.4 trillion to meet Basel-III capital norms and migrate to the Indian Accounting System (IndAS).

This capital requirement is based on the minimum provision coverage rate of 50%, which is estimated by India Ratings’ study of the loan sacrifices lenders have taken so far in resolving stressed loans across sectors.

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