Rating agencies have forecasted that the FY11 is going to see a rise in the non performing assets (NPAs) of banks. Those assets have been referred to as NPAs where the borrower has not paid the interest for more than three months. The possibility of this rise has been indicated in the reports of two rating agencies, Care Ratings and Fitch Ratings.

Care Ratings accounts for this rise to restructured assets slipping into NPAs. "Assuming that 15% of the restructured assets get converted into NPAs in FY11 in addition to the normal system NPAs, this ratio is expected to approximately touch 3.5% for FY11," the report reads.

According to Fitch, "increased NPLs would primarily be from corporate lending, including restructured loans. As this increased NPL ratio on a higher loan base, in effect, this translates into a doubling of the absolute gross NPL amount between March 2009 and March 2011."

"The scope for significant, across the board treasury gains could be limited in the medium term, given the hardening interest rate scenario. Increase in NPA provisioning and rise in slippages in the restructured assets could temper profits for banks," Care Ratings said highlighting management of credit growth and asset quality as key challenges for banking industry.

Care Ratings had undertaken a study of 32 banks of which 25 are public sector entities and 7 private. The agency made an inference noting that in absolute terms, gross NPAs for the selected banks as on March 31, 2010, increased by 25.3% to Rs 71,604 crore, with public sector banks accounting for a large proportion of the same. The overall gross NPA ratio for PSU banks was influenced by increase in slippages in Bank of India, IDBI, IOB and SBI, which together accounted for almost 60% of the rise in total Gross NPAs. The NPA ratios for private sector banks were influenced by ICICI Bank figures, excluding which gross and net NPA ratios stood at 1.61% and 0.46% as on March 31, 2010. Private Sector banks reported a good 7.4% increase in Provision Coverage.

The factors that would be affecting the profitability of banks in this fiscal are the new form of computation of savings account interest rates and the introduction of the base rate system.