Declining margins, rising credit costs and provisions are likely to affect the profitability of banks in fiscal year 2014, according to ICRA Research.

A report by the research firm said, “A weak macro environment, large rupee depreciation, vulnerability of a large number of infrastructure projects and the rising yields will have significant bearing on the earnings and asset quality of the banks.”

The research is based on an analysis of 26 nationalised banks and 15 private sector banks, which collectively accounting for around 90 per cent of the total credit portfolio and deposits of all commercial banks as of June 2013.

According to the report, gross non-performing assets (NPAs) ratio for public sector banks (PSBs) could rise from 4.2 per cent as on June 30, 2013 to 4.8–5 per cent as on March 31, 2014. As the NPAs of PSBs have a larger bearing on the banking system, the gross NPA ratio for banking system as a whole could further rise to 4.2- 4.4 per cent as on March 31, 2014 (3.8 per cent as on June 30, 2013).

Overall gross NPAs for all banks increased to 3.8 per cent as on June 30, 2013 from 3.3 per cent as on March 31, 2013 and 3.1 per cent as on June 30, 2012. Asset quality and earning pressures could make banks more risk averse, which could further make availability of credit scarce even if the credit demand were to pick up.

According to ICRA estimates, return on net worth for PSBs could drop to single digit in 2013-14 which along with low valuations could necessitate them to rely primarily on the Government to shore up capital to comply with Basel III norms or for growth.

For private sector banks, some stress is likely to build up in the commercial, retail and SME portfolio. At the same time, private sector banks with significant infrastructure exposures may see an increase in restructuring, though stress may not get reflected in NPA ratio in 2013-14.

>beena.parmar@thehindu.co.in

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