"Sluggish economic growth, rising interest rates, and the volatile currency are hurting the country's highly leveraged corporate sector," it said in a note, adding that NPAs will grow to 4.4 per cent by March 2015, from 3.4 per cent in March 2013 due to corporate defaults.
The Standard & Poor's report said infrastructure-related segments, metals and mining, commercial real estate and construction-related sectors will continue to show a weakness.
The agency's domestic arm Crisil has pegged the gross NPAs in the system to touch the 4.4 per cent mark by the end of March 2014 itself. S&P did not give an expectation for March 2014. It said the earnings of the banks should remain stressed throughout 2013-14 and 2014-15 due to high credit costs, while the spike in rates is also slated to result in trading losses for banks in FY14.
In its report on emerging market banks, S&P said the risk -adjusted capital ratios of the country's banks have continued to fall, along with their counterparts in Russia, Brazil and China, as lending growth has outpaced earning generation capacities.
On the Basel-III implementation, it said top-tier banks in the country are well placed to achieve the targets but cast doubts over the ability of the smaller banks adding this would lead to consolidation in the sector. "We expect the return on assets to be below 1 per cent for the next two years," it said. It reiterated negative outlook on the banks, in line with its sovereign rating on the country.
Dion Global Solutions Ltd.