Industry body Assocham has asked the government to encourage mergers of smaller banks to create larger ones in order to mitigate risks arising out of surge in non-performing assets (NPAs).
On an average 26 per cent rise in net NPAs have been registered by 21 public sector and commercial banks during the second quarter of the current financial year as against the same period last year, the chamber said.
"The increase in NPA of the compared period should inspire the government to quickly move towards banks consolidation as it will bring down their risks and expand banks balance sheet size to global standard to take on emerging challenges in the financial sector," it said.
As per its analysis, the aggregate NPA of 21 banks – 19 public sector banks and two large private banks - increased by 26 per cent to Rs 25,137 crore in the second quarter of 2009-10 from Rs 19,920 crore against the year ago period.
However, the average capital adequacy ratio (CAR) of the banks improved to 13.68 per cent in the July-September quarter from 12.08 per cent in the previous year, it said.
Improvement in CAR reflects better financial health of banks while increase in NPAs is a matter of concern as it directly affects the solvency and profitability of banks.
"If the NPAs and CAR reported by commercial banks are an indication of their financial strength, the second quarter results of Indian banking sector portray a mixed picture," Assocham President Swati Piramal said.
It further said the latest move by the RBI asking banks to increase their provisioning coverage ratio (PCR) to a minimum of 70 per cent by September 2010 is going to impact the profits of large number of banks.
As against the PCR of 56 per cent as on September 2009, the additional burden on this count, by one estimate, will be around Rs 13,000 crore, it said.
The slow credit growth is further likely to impact the bottom lines of banks. Therefore, the banking sector is likely to see rough weather until the credit expansion takes a fast track, it added.