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Crisis in the waiting for Banking sector?

Stocks from the banking sector have been major beneficiaries of optimism that has been seen since the second week of March. Or what would justify that while the Sensex has gained by a strong 67% since March 9th, the BSE-Bankex is up a whopping 109%. While investors have rooted for stocks from the sector expecting that an economic upturn will be beneficial for the sector, the fact that is not being given much thought is the potential increase in banks’ non-performing assets (NPA) over the next few quarters. At least, this is what the credit rating agency, CARE, believes, as it foresees the net NPAs of the Indian banking sector to triple from the current 1% of advances to 2.7-3% of advances by the end of FY11. As per the agency, given that delayed loan repayments are currently suppressed under the shadow of restructuring where banks are giving more time to companies to pay back their loans or are lowering interest rates to help companies pay back faster, they will emerge bad once the restructuring ends. Special mention has been given to the banks’ retail lending (especially segments like credit cards and personal loans), where NPAs are likely to touch as high a level as 10-12%.

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