Banks' gross non-performing assets (NPAs) increased to 4.5% as in December 31, 2014 from 4.2% as in September 30, 2014. While the Gross NPA percentage crossed 5% for PSBs, for private banks it was marginally up at 2.1%, according to ICRA, a credit rating agency.

PSBs' Gross NPA percentage increased following a sharp drop in NPA recoveries, upgrades to 14% in the third quarter of FY2015 from 25-45% in the previous four quarters and a mere 2% growth (year till date, or YTD) in credit. PSBs' fresh NPA generation rate remained unchanged at 3.3% in Q3, FY2015; slippages from restructured advances accounted for around 25% of fresh slippages in Q3, FY20152 . The fresh NPA generation rate for SBI dropped to an 11-quarter low of 2.4% in Q3, FY2015 even as fresh NPA generation for nationalised banks was 3.7% in the same period,'' it added.  

''While CDR3 referrals declined in 9M, FY2015 vs. FY2014, gross addition to restructured accounts for PSBs remained high at around 2% (annualised) of opening standard advances in Q3, FY2015 (as restructuring outside CDR remained high). PSBs' Net NPAs accounted for 36% of their Net Worth as on December 31, 2014; however, there was wide divergence among PSBs on this with the Net NPAs as a percentage of Net Worth ranging from 22% to as high as 117%,'' ICRA said.

''Banks' Gross NPAs are expected to increase significantly in FY2016 following withdrawal of regulatory forbearance. In ICRA's estimates, banks' Gross NPAs could rise to 5.1-5.7% by March 2016 from 4.5% as in December 2014. However, total stressed advances (Gross NPAs plus standard restructured advances) could moderate in FY2016 with economic activity picking up and the Reserve Bank of India’s (RBI’s) norms for flexible structuring of loans to operational projects reducing the flow of impaired assets.''

''PSBs' Return on Net Worth dropped to 7.1% in Q3, FY2015 from 8.9% in the previous quarter despite higher treasury profits. Private sector banks on the other hand were able to maintain their earnings at 16-17% during the same period. Increase in credit costs led to profitability pressures for PSBs in Q3, FY2015, and for them such costs are unlikely to decline in the short term. Private banks are likely to report strong earnings over short term on the strength of better credit growth and superior asset quality.''

''The Government of India's (GoI's) new criteria for fresh equity infusion in PSBs may sharpen the latter’s focus on earnings and could impact the ability of some to grow. Banks could issue over Rs. 1 trillion capital instruments in FY2016, with around half the amount in the form of Tier I capital instruments; Of the total projected amount, PSBs could raise 80% and private banks the rest 20%. Credit demand pick up, softening interest rates and improving capital markets could partly alleviate profitability and asset quality pressures for banks while volatility in foreign exchange (forex) rates and commodity prices, and settlement of pending wage revisions at PSBs would impact the earnings in FY2016.''