Stressed assets of Indian banks, including both bad and restructured loans, may surge to 14 per cent of total loans by March 2015 from 9 per cent in March 2013, according to a report by India Ratings and Research.

However, the pace of accretion in non-performing loans (NPLs) is likely to ease after September because of an expected rebound in economic growth and improved loan recoveries, said the report by India Ratings, an arm of global credit rating agency Fitch Ratings Ltd.

“The premise may have to be reversed if growth remains elusive and volatility in the currency market forces a continuation of tight monetary conditions. High corporate leverage indicates a limited capacity to absorb further pressures on costs and banks could face a fresh wave of NPLs if corporate profitability continues to fall,” said Ananda Bhoumik, Senior Director at India Ratings.

According to him, high corporate leverage indicates a limited capacity to absorb further pressures on credit costs and banks could face a fresh wave of NPLs if corporate profitability continues to fall.

“Also given the turbulence in the system, margins will remain under pressure though resilience is intact,” Bhoumik added.

Infra loans under pressure

Restructuring of infrastructure loans will likely continue as the sector grapples with execution challenges and rising costs. “About 20 per cent of infra loans were restructured till March last year and the proportion could increase to 30-40 per cent over next two years. Credit losses are, however, expected to be contained due to their long-term viability,” Bhoumik said.

A slump in economic growth to 5 per cent in the last fiscal year, the slowest pace in a decade, high borrowing costs in the face of persistent inflation and delayed project approvals that constrained corporate cash flows have made it tough for many borrowers to service debt, leading to a pile-up of bad loans in recent months.

According to the report, while a pick-up in real GDP growth may improve cash flows from mid-2014, any failure in this revival and further increase in interest rates may result in a wave of failed restructuring that may test the profits of a broader base of government banks and some of the weak private banks.

India Ratings expects India’s economic growth to rebound to 5.6 per cent in fiscal 2015 driven by an investment revival coupled with stronger performance from exports.

Interest rate impact

“Stable or marginally lower interest rates are expected to prevail, which should help improve corporate margins and interest coverage measures, which are currently at a five-year low,” the report said.

Reserve Bank of India on Tuesday hiked its key policy repo rate by 25 basis points to 8 per cent citing higher consumer prices but also hinted that further rate hikes are unlikely if consumer prices stay at current levels.

“In case interest rates were to rise further and profitability will reduce, the resilience of the banks will change and NPLs may double,” Bhoumik said.

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