Domestic rating agency Icra today said gross NPAs in the system may jump up to 5.9 per cent this fiscal from 4.4 per cent despite economic growth because of lagged recognition of bad assets which is resulting in slippage of more restructured accounts into dud loans.
"Reported gross NPAs will increase in FY16 with withdrawal of regulatory forbearance for restructured advances from FY16 to 5.3-5.9 per cent by March 2016 as against 4.4 per cent as in March 2015," the agency said in a note.
The rising NPA estimate for FY16 is primarily driven by a greater proportion of assets restructured in the past slipping into NPAs again, Icra's senior vice-president Vibha Batra told reporters in a conference call.
"What we are experiencing is a lag in recognition of asset quality stress. Around 25-30 per cent of restructured assets have already slipped into NPAs, now we are increasing our estimate of such slippage to 35-40 per cent from the earlier 30-35 per cent," she said.
The system of asset recasts has been discontinued by RBI, starting April 1, but banks continue to carry loans restructured in the past.
Icra also feels that the profitability in the banking sector, especially state-run banks, will be under pressure if they are forced to pass the rate cuts by RBI to their lending rates by the government.
The state-run banks carry more long tenor deposits compared to their private sector peers and it takes longer, as long as up to 18 months, for the cost of funds to be repriced, she said, warning such pressure may be detrimental to profits.
The asset quality woes coupled with the low credit growth, which can be partly blamed on the government's shift to supporting only well-performing banks, will put the margins under more pressure, she said, without giving a level.
Icra's senior vice-president Vibha Batra said State Bank group's capital adequacies are better than rest of the state-run banks, and also warned of poor net-worth to NPA ratios which may affect the banks.
Pressure on profitability will not bode well for the system, considering that last year, the system's profit growth stood at a paltry 1 per cent, Icra said.
A stress-test assuming 40 per cent of the restructured assets slipping into NPAs and a recovery of 30 per cent revealed that the state-run banks will have to provide for Rs 1.5 trillion, which can witness 30 per cent of their net-worth getting wiped out, and the capital adequacy ratios falling to 6 per cent, which is lower than the mandatory 7 per cent.
The Basel-III compliance and an estimated credit growth of up to 12.5 per cent means the banks would require up to Rs 1 trillion in capital infusions in FY16, she said, adding that the difficulties in raising resources through the additional tier 1 (AT-1) instrument is a concern.
Terming it a "vicious cycle", she said over two-thirds of the state-run banks may get affected due to capital problem.
The government, which has maintained its capital infusion budget for the fiscal, will have to look at alternatives like compensating the banks for rate cuts by getting interest on CRR or also defer its policy of supporting only well performing banks, Batra said.
She expects the domestic deposits to grow in the range of 11.5-13 per cent in FY16.
Weak monsoon to be credit negative for India: Moody's
A weak monsoon is likely to be credit negative for India as it is expected to push up food inflation as well as government deficits, global rating agency Moody's said today.
The Indian Meteorological Department (IMD) has revised its monsoon forecast for 2015 from "below normal" to "deficit".
"A weak monsoon is credit negative for India because it lowers agricultural output, increases food inflation and adds to government deficits," said a Moody's Investors Service report.
The magnitude of the negative effect will depend on the actual spatial and temporal distribution of rainfall as well as policy measures the government adopts in preparation and in response, it added.
"...a weak monsoon would likely raise food prices, which have been rising faster in India than the global average.
Because food accounts for more than 50 per cent of average household spending in India...higher food prices pinch household budgets in India to a greater degree than elsewhere, and hurt GDP...," the agency said.
India's inflation touched double digits in 2012 and 2013 partly because of high food prices, but is now below the RBI's January 2016 target of 6 per cent, it said.
Decline in inflation and flagging private sector consumption as well as investment growth have led the Reserve Bank to cut the policy rate by 75 basis points since January, but the forecast of a weak monsoon season will curtail further rate reductions, the agency said.
Inflation, as measured on the Wholesale Price Index (WPI), has been in the negative zone since November, 2014. Retail inflation in April softened further and fell to a four-month low of 4.87 per cent.
Moody's said that below-average rainfall in 2014 slowed agricultural output growth to 0.2 per cent that fiscal year, compared to 3.7 per cent the previous year, when rainfall was at average levels.
Agriculture comprises about 17-18 per cent of GDP so lower farm output could temper 2015 GDP growth in the absence of higher growth in other sectors, Moody's said.
Moreover, it added, agriculture is a source of income for over half of rural Indian households.
The government plans to counter the effects of a weak monsoon through increased monitoring of rainfall and sowing, releasing buffer grains and introducing crop insurance programmes.
Moody's said that subsidies to farmers and for food could dampen the effect of the monsoon, but would pose fiscal costs that the Indian government, with its budget deficits and debt well above the average for comparable sovereigns, can ill afford.