According to the Fitch Ratings agency, the banking system at present has stressed assets of around Rs 9 trillion.
International ratings agency Fitch on Thursday said the non-performing assets (NPAs) ratio of banks is likely to improve marginally to 10.9% by the end of this fiscal.
"We expect banks' stressed assets ratio to improve marginally to 10.9% in 2015-16 from 11.1% in 2014-15, although there is still some time before absolute non-performing assets (NPAs) witness a reversal," Fitch's Director for Financial Institutions Saswata Guha told reporters.
According to the agency, the system currently has stressed assets of around Rs 9 trillion.
"We will see some more NPAs in the coming quarter as the system is trying to catch up with some legacy problems," he said, adding that new NPA generation has started to slow down at many banks and there could be greater traction with cyclical recovery.
"The worst is behind us and once banks are through with provisioning with respect to the existing stressed assets, things should start looking better," Guha added.
The agency believes that capital will emerge as the main theme as banks look to pursue sustainable growth rates while achieving Basel-III capital requirements and cushioning balance-sheet stress at the same time.
Guha said banks will require close to $140 billion (nearly Rs 9.41 lakh crore) in total capital to ensure full Basel-III implementation by 2018-19, which will not be easy unless banks tap new channels for funds.
"So far, whatever the government has provided or is likely to provide in this financial year and will provide next year should ideally support the financial profiles. Having said that, we believe that the government needs to provide more capital as far as core equity is concerned," Guha said.
The ratings agency expects credit growth at 12-13% in 2015-16, moderately higher than the 9.7% in the previous fiscal.
"Lack of firm credit demand and risk aversion are key factors behind the slow credit recovery, although state-run banks also face constraints due to weak capital buffers and balance-sheet stress," he said.
Speedier resolution of stalled projects is essential for any meaningful revival in private-capital investment and credit growth, the agency said, adding that consolidation will be positive in the long-term for the system.
"We believe that consolidation coupled with higher capital infusion and governance reforms would position the banking system better in support of a more open and higher-growth economy," Guha said, adding that more large banks similar to the State Bank of India will help the financial system.
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