"Gross NPAs could be nearing peak levels. We project banks' gross NPAs to be in the range of 8-8.5 per cent by March 2017," it said in a report here.
Banks' gross bad loans stood at 7.7 per cent as on March 2016.
It added asset quality is not expected to improve substantially in near term.
"Significant improvement in asset quality will hinge upon economic recovery in credit intensive sectors, as well as successful execution of deleveraging efforts by some stressed corporate groups," he said.
Also Read
In the last fiscal, banks' aggregated deposits grew by merely 6.4 per cent as against 10.3 per cent in 2014-15.
"Sluggishness in deposit growth could be on account of psychological impact on depositors following a decline in nominal interest rates on deposits, significant raising of tax-free bonds over the last few years providing alternative safe savings avenue, increase in limit for remittances and banks reducing dependence on large ticket deposits on the back of muted credit growth," the report said.
The report said relaxations in Basel III norms in March 2016 improved state PSBs tier-1 capital by 30-100 basis points.
Despite relaxations, infusion of Rs 25,000 crore by the government and low credit growth, state-run banks' capitalisation remained low with aggregated tier 1 at around 9.1 per cent as on March 2016.
"PSBs will need Rs 40,000-50,000 crore tier 1 capital raising in this fiscal as against as against government capital infusion plan of Rs 25,000 crore," it added.
Over the next three financial years, state-owned banks will need tier 1 capital of Rs 1.7-2.1 trillion.