Banks need to set aside Rs 3.3 tn as NPA provisioning in FY18

The report said with the economic value of assets underlying NPAs eroding with time, and resolutions are hard to come by, banks would need to step up on provisioning, mainly for large corporate NPAs. It will facilitate faster clean-up of their balance sheets.

"Our estimates show that banks would need to set aside close to Rs 3.3 lakh crore this fiscal, or 50 per cent more than Rs 2.2 lakh crore they provided for NPAs last fiscal," Crisil said in the report released here today.

The provisioning quantum was arrived at after an account-by-account analysis of the economic value of assets underlying large corporate NPAs.

The potential write-downs could be in the 25-75 per cent range, the rating agency said.

While some of the NPA accounts have been adequately provided for, the majority of them will require higher provisioning compared with current levels, based on the residual economic value of the assets, it said.

"It could lead to a net loss of nearly Rs 60,000 crore for the banking sector this fiscal with public sector banks (PSBs) bearing the brunt of increase in provisions and the resultant impact on profitability because of their higher stock of NPAs," the report said.

Though the assessment assumes effective resolution of stressed assets this fiscal, any delay would extend the pain on profitability into the next fiscal too.

It further said banks operating profitability is likely to stabilise by the end of this fiscal due to improvement in the net interest income.

It will be supported by lower interest reversals on non-performing assets (NPAs), pick-up in credit growth, and reduction in funding costs.

"Pressure on the earnings profiles of banks would reduce from next fiscal if banks increase provisioning on large corporate NPAs this fiscal," the rating agency's senior director (ratings) Krishnan Sitaraman said.

Stabilisation in operating profitability and mitigation of asset quality stress would then set the stage for earnings revival, especially of PSBs, as they focus more on credit growth, Crisil said.