Banks' bad loans to rise to 12.5%, says India Ratings

RBI has asked banks to recognise weak assets and make accelerated provisions by March 2017

The Indian banking system's impaired asset loans are expected rise to 12.5 per cent by March 2017 on the Reserve bank of India (RBI)'s stringent norms to recognise stress in the system and high corporate leverage, according to India Ratings.

In its FY17 outlook for the banking sector, it said the credit costs, the amount set aside for bad loans, are expected to increase sharply in FY16 and FY17.

The impaired assets - including gross non-performing assets (NPAs), standard restructured assets and asset reconstruction company receipts would rise to 12.5 per cent compared with 10.8 per cent in FY15.

As a step to clean up the balance sheet by March 2017, RBI has asked banks to recognise weak assets and make accelerated provisions.

It has maintained a stable rating and sector outlook on private sector banks and a stable to negative sector outlook for public sector banks (PSBs) for FY17.

Capital requirements towards Basel-III transition have continued to increase in FY16, despite the Rs 70,000-crore capital infusion by the government in PSBs under the Indradhanush plan.

India Ratings will watch out for any addition capital infusion announcement in the forthcoming Union Budget.

Large private banks and some large PSBs were to be better placed with healthy internal accruals, strong capitalisation and better access to the capital markets, it said.

Most PSBs are likely to be under pressure to consolidate growth and focus on profitability, given their significant capital requirements both from the government and capital markets, it added.

However, credit growth was likely to get some support from the macro tailwinds going into FY17. Consequently, the agency expects the banking system's return on assets to dip in FY16 and then marginally rise in FY17.

Long-Term Issuer Ratings for PSBs were largely support-driven and would change only if there was any change in the government's support stance or a relative shift in their systemic importance.