Rating agency Care Ratings said the gross non-performing assets ratio of domestic banks will increase to 4.5 per cent by March 2014 and impact the profitability by up to 30 per cent.
"Deterioration in asset quality continues to be the major factor impacting profitability of banks in the near future," it said in a report, adding that a higher proportion of the NPAs will come from the state-run lenders.
It said the overall NPA ratio will move up to 4.5 per cent by end-March from the 3.98 per cent in September 2013.
The agency's survey included all the 26 state-run banks and 14 private sector ones.
With a rise in restructured assets, which touched Rs 3.6 trillion (Rs 360,000 crore) from March 2013's Rs 3.4 trillion (Rs 340,000 crore), the banks will have to provide more due to a change in the Reserve Bank's
"These factors would exert downward pressure on margins and are likely to impact profits for FY14 by around 25 per cent to 30 per cent."
State-run banks are under more pressure and will see their overall NPA rise further to 5 per cent from 4.47 per cent in September, it said.
On the capital adequacy, where the Government has already exhausted its Rs 14,000 crore (Rs 140 billion) budget for the fiscal, Care Ratings said it will need to infuse more.
"The Government of India (GOI) would be required to infuse capital in PSBs to enable them to maintain adequate cushion to withstand asset quality pressures and comply with Basel III norms," it said.
Care expects the credit growth of the banks to go up to 13-15 per cent, given that it expects a 4.9 per cent GDP expansion during the fiscal, adding that deposit growth will come at 14-15 per cent because of the impact of high inflation on savings.
