Back in April this year, the rating agency Crisil warned that gross Non-Performing Assets (NPA) of banks in India may reach 5% by 2011. Most of the rise in NPA will be due to problems with commercial loans.

ICICI Bank’s (IBN) NPA stood at 4.33% in May a 1% increase over the previous year. The NPA of HDFC Bank (HDB) was at 1.91% of total assets. However both these banks are exposed to high retail loans due to aggressive growth in the past few years. Comparatively ICICI is a bit more risky than HDFC.

Despite the rating agency warning, the NPA ratios of Indian banks are small and manageable even if they grow to 5%. This is because historically the NPA has decreased over the past few years as shown below:

Year 2003 = 9.06%
Year 2004 = 7.19%
Year 2005 = 4.91%
Year 2006 = 3.48%
Year 2007 = 2.66%
Year 2008 = 2.40%

Source: Reserve Bank of India

So NPA is projected to double by 2011 from last year’s 2.4%. However as mentioned above, the NPA ratio fallen continuously from 9% in 2003 to less then 3% in 2008. So the rise to 5% in 2011 may not be a severe hit to the banks. While rising NPA is a cause for concern, it may not derail the growth of the banking sector in India and it will be manageable as banks have adequate capital reserves/