The credit rating agency, Crisil estimates the gross non-performing assets (NPAs) of the banking sector to increase to around 5% by 2011 and in absolute terms it is expected to rise to nearly three times of the March 2008 level. In March 2008, the gross NPA were about 2.3% at Rs 55,000 crore. The firm expects this figure to rise to Rs 1.9 lakh crore in the next two years. Further it said that most of the NPAs would come from corporate sectors that also include the small and medium enterprises (SMEs). Crisil's Head of Finance Sector Ratings, Mr Tarun Bhatia said that main reasons behind the rise in NPAs are inadequate demand, lack of funding, lengthy working capital process and the significant movement in foreign exchange rate. The retail sector is expected to experience a 1.5% rise in its gross NPAs to 4.7% from 3.2% by 2011. Commercial vehicle loans and unsecured loans portfolio are the two main areas of concern in the retail assets. However the report by Crisil says that since the financial institutions have not increased their incremental exposure to unsecured loans portfolio, the impact is expected to be limited. Mr Bhatia said that the rising default cases will have an adverse effect on the overall profitability of the banking sector as the banks would have to make higher provisions, which means a lower profit margin. Banks will have to keep aside about 25-40% of their profits as provisions due the rising risk of default. The effect of rising defaults would result in higher provisioning. However, the strong capitalization of the banking sector will able to absorb the effect of the increased NPAs. These days the asset portfolios of banks are more diversified and nearly 50% of the retail portfolio constitute of mortgage that has a controlled delinquency ratio. Further Crisil says that most of the restructured assets are in the NPA category would be much lower. Mr Bhatia said that nearly 20% of the incremental NPAs may be restructured under the RBI's package. Meanwhile the service sector that comprise of 22% of the corporate portfolio is expected to perform well during the period. |
