Two reports submitted in the past one week, one by Care Ratings and another by Fitch Ratings have highlighted the possibility of a rise in the non performing assets (NPAs) of the banks for the next financial year.  By NPAs, banks mean those loans which have not earned them any interest for over 90 days.

 The report by Care Ratings, released this week said that such rise in NPAs will result from the 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," it explained.

Whereas 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." Thus it expects the gross NPL ratio for the Indian banking system to vary somewhere between 3.2% and 3.5% at March 2011, up from 2.5% at March 2010.

Care Ratings think that the key challenges for the banking industry would be to sustain earning growth alongside managing credit growth and asset quality. It has been found saying, "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 (especially PSU banks)."

Care Ratings studied some 32 banks of which 25 were public sector banks and 7 were private banks. Its study reveals 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. They together accounted for almost 60% of the rise in total Gross NPAs. Whereas, 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.

Bank profitability in FY11 would be affected by the new format of computing interest rates on savings account balances and the introduction of the base rate system. Till lately, banks have been paying interest at 3.5% on the lowest minimum balance kept in the savings account between the 10th and the last day of the month. But from 1^st April, 2010 onwards, they will start computing interest payable on savings bank accounts daily. The impact of this move will depend on the composition of deposits in the bank and will be visible from the first quarter of FY11. But the introduction of the base rate system is not expected to have a huge impact on the NIMs of various banks, as claimed by Cara.