Gross non-performing assets (GNPAs), or bad loans, in domestic banks are likely to cross the Rs 10-lakh crore mark in the current financial year to March 31 (FY19) owing to changes in the NPA recognition norms.
GNPAs as a proportion of total advances are seen at 10.3 per cent in the current financial year, as they are expected to start declining after touching a high of 11 per cent during the year.
Gross bad loans stood at 10.5 per cent in recently concluded financial year (FY18) as NPA recognition gathered pace and staying at 9.4 per cent in the previous fiscal year (FY17).
"Stressed assets are estimated at around 14 per cent of total advances, and are not expected to increase significantly," Crisil said in a report.
Interestingly, the report identified that more than 70 per cent of the stressed loans has already been recognised as NPAs by lenders.
The pace of fresh additions to NPAs declined marginally in the first nine months of financial year 2018, compared to the corresponding period of the previous year.
The slippages should moderate in FY19, supported by continued improvement in the credit outlook of the corporate sector, driven by rising commodity prices, stabilisation of operating cycles, and improved debt protection metrics.
The slippages ratio could reduce to 4.3 per cent of opening advances in fiscal 2019 from around 5 per cent in the first nine months of fiscal 2018.
In absolute terms, slippages are expected to remain high, because of the slippage to NPAs in stressed accounts that were referred to various restructuring tools of the RBI in the past.
Any material additional impact due to recent revisions in the resolution framework by RBI will remain monitorable, the report said.
The report sounded optimistic of the 12 cases reported to the National Company Law Tribunal (NCLT) earlier last year and another 28 cases referred later.
With nearly half of the large-ticket corporate NPAs now referred to the NCLT under the IBC route, the ability of banks to resolve the stressed assets, mainly NPAs referred to the NCLT, will increase and it will enable them to reduce their bad loans over the medium-term, the report said.
Sectors such as steel, which constitute a significant portion of the banking sector NPAs, are seeing an uptick because of firming up commodity prices.
This will help in the resolution process. Backed by the expected resolution in accounts under the IBC, recoveries and upgrades as a percentage of opening GNPAs will pick up in FY19 after having declined in the past few fiscals.
Meanwhile, provisioning costs are expected to remain high, from stiff haircuts that lenders would need to take on large corporate NPAs (referred to NCLT under IBC).
Banks would need to set aside around Rs 2.6 lakh crore in FY18 and around Rs 2.4 lakh crore in FY19, mainly towards NPA provisioning.
Resolution through the IBC route will necessitate an increase in the provisioning cover ratio (excluding write-offs) to 55-60 per cent by the end of the current financial year.
The rollout of the revised framework for resolution of large stressed assets could lead to more progress in resolution compared with previous years, which could also result in acceleration in NPA provisioning.