Higher slippages could dent banks’ profitability in the quarters to come, the Reserve Bank of India (RBI) has warned, urging them to increase provisioning levels.
At the end of September, gross non-performing assets (NPAs) were up 45.7% on year, far outpacing the 16% growth in gross advances during the same period, according to RBI’s Financial Stability Report, released on Friday.
The macro stress test of sectoral credit risk carried out by RBI revealed that agriculture is likely to see the most NPAs by March, at 5.8% of the total advances, followed by engineering (4.7%), iron & steel (4.7%) and construction (3.7%).
Worsening credit quality, in turn, could impact banks’ profitability, the central bank said.
Their net interest margins (NIMs) would be affected by lower yields on assets, which would offset the benefit of a possible decline in the cost of funds.
At the system level, NIMs were about 3%, RBI said.
The banking regulator flagged the declining provisioning coverage ratio. In the second quarter, provisioning coverage levels of some public sector banks were seen falling below 60% from the 70% stipulated in September 2010.
“In view of this, it may be advisable for banks to increase their provisioning levels,” said RBI.
The regulator also warned banks of a liquidity stress in the wake of lower deposit growth over several quarters.