Gross non-performing assets (GNPAs), or bad loans, of commercial banks may rise to 8.5 per cent of total assets by March 2017, from 7.6 percent in March 2016, the Reserve Bank of India (RBI) said on Tuesday based on "stress tests" it has conducted.
"Risks to India's banking sector have increased since the publication of the last Financial Stability Report (FSR) in December 2015, mainly on account of a further deterioration in asset quality and low profitability," RBI said in its latest FSR 2016.
"The gross non-performing advances rose sharply to 7.6 per cent of gross advances in March 2016 from 5.1 per cent in September 2015, largely reflecting re-classification of restructured advances to NPAs following an asset quality review (AQR).
"The macro stress tests suggest that under the baseline scenario, the GNPA ratio may rise to 8.5 per cent by March 2017 from 7.6 per cent in March 2016," it said.
"If the macro situation deteriorates in the future, the GNPA ratio may increase further to 9.3 per cent by March 2017," the report added.
Banks are currently focusing on cleaning their balance sheets following the AQR that showed up around $35 billion of new bad loans since September, pushing gross bad loans to 7.6 per cent in March from 5.1 per cent in September 2015.
Overall stressed assets - consisting of bad loans as well as restructured assets - rose to 11.5 per cent in March from 11.3 percent six months earlier.
"The stress in the banking sector, which mirrors the stress in the corporate sector, has to be dealt with in order to revive credit growth," RBI Governor Raghuram Rajan, who had ordered the banks' AQR last year, wrote in the report.
Instead, non-banking finance companies (NBFC) have reported an improvement in most of their performance metrics, the FSR said.
The gross non-performing assets (GNPA) ratio for the NBFC sector declined to 4.6 per cent of the total advances in March 2016 from 5.1 per cent in September 2015.
"While the regulatory norms for the NBFC sector are sought to be brought closer to those applicable to banks, the performance of this sector (return on equity and return on assets) seems to be much better as compared to that of banks," the report said.
It noted that loan growth of the NBFC sector was at 16.6 per cent for fiscal 2016, nearly double compared with the 8.8 per cent growth in aggregate credit across the banking sector. The aggregate balance sheet of the NBFC sector expanded by 15.5 per cent for fiscal 2016 compared with 15.7 per cent the previous year.
The study, covering the 11,682 NBFCs operating as of March 2016, also found the capital adequacy ratio for NBFCs as a whole improved to 24.3 per cent as of March 2016 from 23.85 per cent in September 2015.
In the connection, the report said stressed companies are deleveraging fast and number of "weak" companies are declining.
The RBI survey showed the proportion of private non-financial leveraged companies that have negative net worth, or debt to equity ratio of more than 2, declined sharply from 19 per cent in March 2015 to 14 per cent in March 2016. The share of these companies in the total debt also declined from 33.8 per cent to 20.6 per cent.
Similarly, the proportion of "highly leveraged" companies, with debt to equity ratio of more than 3, declined from 14.2 per cent to 12.9 per cent.
Further, the share of "weak" companies -- defined as those having interest coverage ratio of less than 1 -- declined to 15 per cent as on March 2016, compared with 17.8 per cent in March 2015.