The Reserve Bank of India (RBI) on Wednesday expressed concerns over a rise in bad loans of Indian banks in the coming 12 months due to weak corporate earnings and the firms' escalating debt levels.
Despite an improvement in companies' overall ability to repay debt in the first two quarters in the current fiscal year, the report said state-owned banks are likely to see an increase in bad loans over the next year.
The report warned over bad debt getting "more concentrated" among large, highly leveraged borrowers.
"Corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring," RBI Governor Raghuram Rajan said in the foreword of the semi-annual Financial Stability Report.
Large borrowers accounted for 87.4% of the bad loans in September this year compared to 78.2% in March.
"One of the possible inferences... could be that banks extended disproportionately high levels of credit to corporate entities/promoters who had much less 'skin in the game' during the boom period," said the report.
Five sectors -- mining, iron and steel, textiles, infrastructure and aviation -- which took 24.2% of advances from India's banks by June this year, accounted for 53% of the stressed debt, according to the report.
Overall, the gross non-performing assets (NPAs) of scheduled commercial banks, as a percentage of loans, increased to 5.1% in September 2015 from 4.6% in March.
Under the baseline scenario tested for the report, overall NPAs are projected to rise to 5.4% by September 2016 before improving.
"The banking stability indicator shows risks increased since the publication of the previous FSR (in June). The factors contributing towards increase in risk during the current half-year are deteriorating asset quality, lower soundness and sluggish profitability," said the report.
A significant number of companies that have troubles with "high leverage, low cash generation and challenges in accessing capital" will weigh on the capital expenditure growth over the next two to three years, the Business Standard reported, citing a report by India Ratings released in September.