Mumbai:  Gross NPA ratio of India’s public and private sector banks is expected to deteriorate further to 4.2-4.4 per cent in March from the preceding quarter’s 4.1 per cent, dragged down by a poor show by state-run lenders, rating agency Icra today said.

“The gross NPA percentage for banking system as a whole could rise further to 4.2-4.4 per cent as on March 31, from 4.1 per cent as on December 31, 2013,” it said in a note.

Within the spectrum, the 26 public sector banks (PSBs) are likely to perform badly than their private peers on the asset quality front. The gross NPAs for this grouping will go up to 5 per cent from the 4.7 per cent in December.

The rating outfit blamed this expected slippage on the current business slowdown, stretched working capital cycles of corporates and slow pace of economic recovery.

Icra said the RBI’s proposed framework for the early detection of NPAs and better management of bad assets can be a positive for the sector.

“The RBI framework is expected to strengthen banks’ monitoring process and joint efforts for resolution/recovery and could have a positive impact on their asset quality over the medium to long term.”

The rise in the bad assets, coupled with other factors like lower net interest margins, lower non-interest income, higher credit provisions and depreciation on fixed income investments, is expected to drag the PSU banks’ profits by 30-40 per cent in FY14 from the FY13 levels, it noted.

The agency said there are contrasts between the government banks and their private counterparts when it comes to asset quality. The 16 private sector banks’ gross NPA ratio had stood at only 1.9 per cent at the December quarter-end.

Highlighting the PSU banks’ need to raise Rs 2-2.2 trillion in capital till FY18, Icra said they will have to show improvement on the asset quality front in order to mobilise the required capital from external investors.

“Private banks are expected to be comfortable on capital, given their higher level of current capitalisation and better earnings,” it said, adding this grouping will need around Rs 1 trillion in capital till FY18.

There are several banks, including the largest lender SBI, which have gross NPA ratios above 5 per cent.     State-run United Bank of India has been in the news over its bad loans.

The Kolkata lender has had to take several tough decisions after its gross NPA ratio ballooned to over 10 per cent in December.

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