NPAs of banks likely to rise to 2.7% of advances in FY'12

Ratings agency ICRA today said the asset quality of banks could deteriorate further to 2.7% of total advances in the current fiscal due to pressure on interest rates.

"The gross NPA (non-performing asset) percentage (for public and private sector banks) could increase to 2.3-2.7% as on March 31, 2012, from 2.3% in the previous year," ICRA said in a study.

Further, if interest rates continue to rise, it could negatively impact asset quality, it said in a report. On interest margins, the ICRA said a temporary slack in credit growth and adjustments in lending rates (to incorporate a higher rate on saving deposits, etc) may lead to a dip in the Net Interest Margin (NIM) in the first half of 2011-12.

Subsequently, the NIM could recover, depending on credit offtake, it said, adding that despite the high levels of operating expense, banks are expected to report good core profitability, given their reasonable NIMs and lower credit
provisions, it said.

At the same time however, depreciation on investments because of rising yields (50-75 basis points from the March  31, 2011, levels) could pull down profitability by 5-10 basis points, it said.

Despite some deterioration in the operating environment vis-