Ratings agency Fitch said the cumulative gross NPLs reported at India's five largest banks that account for over a third of the system assets, increased by around 62 per cent in the June quarter from a year before, and there was also a sharp increase in restructured assets.
"Our estimate of 3.75 per cent for system-wide gross NPLs in the fiscal year ending March 2013 (FY12: 2.9 per cent) could therefore be exceeded in light of the continuing pressures on the economy," Fitch said.
The bank Nifty, a crucial benchmark of banking stocks, fell sharply and traded below the strong support of 10,000 mark.
On the Nifty, private lender Axis Bank was the top loser, down 4.7 per cent at Rs 932.40. Global brokerage major Morgan Stanley has downgraded the stock to underweight and cut the target price by 30 per cent to Rs 800, saying rising impairments will weigh on the stock.
Morgan Stanley expects Axis Bank's impaired loan formation to rise to 4 per cent in FY14 and EPS (earnings per share) growth to slow in FY14.
ICICI Bank, India's biggest private lender, traded nearly 3 per cent lower at Rs 886.50.
PSU lenders like Bank of Baroda, down 2.7 per cent, and State Bank of India, down 1.9 per cent, also traded with deep cuts.
"We expect stressed assets in the system, including unseasoned restructured loans, to reach around 10 per cent by FY13 from 6.7 per cent in FY10," Fitch added.