In its first report on the Indian banking sector, CARE Ratings predicted a likely increase in the NPAs of the Indian banks by three times by 2011 from the current one percent.

Referring to the space given by RBI to the banks, the report said, "NPAs are suppressed under the shadow of restructuring." The report indicated the banks can restructure the advances by extending the pay back period or revising the lending rates.

Parag Jariwala, analyst at CARE Ratings, cautioned the public sector banks: "there could be slippages from restructured loans," if economic slowdown continues for next year, he said.

He added, "However, NPAs in the current downturn cycle will be lower than in the previous cycle because credit is widely spread and share of small scale credit is 18% of the industry down about 10-12% from the last cycle. Retail will bleed more than corporate especially bad loans from credit cards and personal loans which will increase 10-12%."

CARE also said that there would be more slippages in the retail advances as compared to the corporate loans. Further, the NPAs for the private and foreign banks would be higher due to higher proportion of retail advances in their portfolio as compared to PSBs. The restructuring drive by the public sector banks will also enable in deferring the NPAs.

The Indian Banking system however, is expected to remain immune due to the wide presence of public sector banks, high capital adequacy and implementation of Basel II norms. As pointed by Rajesh Mokashi executive director, Care ratings, "The current capital adequacy ratio is 13%, but if we do some stress testing assuming NPAs will rise by 100% (double) or even 150% in the next year, even then the ratio is above the 9% required at 11.5% or 11% respectively."

The agency also stated a 15-17 percent growth in bank advances during FY 2009-10 and a 19-21 percent during FY 2010-11. The key driver in lending is seen to be the infrastructure sector.

The agency expects a 18-20 percent deposit growth during both 2009-10 and 2010-11. The report said, "Fresh credit demand will be hit by slower economic growth due to both recession in developed economies and sluggish domestic demand."

Earlier, in his speech at 62nd annual general meeting of the Indian Banks' Association, RBI's Deputy Governor, Dr Rakesh Mohan had confirmed the Indian banks are fundamentally strong. He also stated that banks have more scope for lowering the lending rates. Besides, the recent stress tests conducted by RBI on the Indian banking system showed if Indian banks were to increase NPAs by 100 to 200 percent, the overall capital adequacy ratio would remain justifiable.