Mumbai, March 16: Indian banks' may face rising non-performing assets in next fiscal in the face of economic slowdown, financial services
major ING Vysya feared on Monday.

"We expect the NPA levels of Indian banks to go upto 3.5-4 per cent levels in the next financial year as against 2.5-3 per cent expected in this fiscal," ING Vysya Bank's Economist, Financial Markets  Deepali Bhargava told reporters here.

Indian banks have witnessed a sharp increase in their badloans, especially in consumer and credit card loans in the last one year on account of the impact of global financial crisis in the domestic economy.

Sectors that are likely to witness a surge in sticky assets are real estate, textile and garments and consumer loans, Bhargava said. Banks are likely to be risk averse to vulnerable sectors in FY 09, which may moderate the credit growth further to 17-18 per cent in FY 10, she said.

On the other-side the deposit-base of Indian banks are likely to grow by 16.5 per cent on a year-on-year basis, Bhargava said. Noting that a low demand and lagged impact of aggressive monetary tightening of Reserve Bank could slow down the GDP growth, Bhargava said the country's GDP is expected to grow at 6.5 per cent in FY 09 as compared to Government's projection of 7.1 per cent.

GDP growth in 2009-10 is likely to be in the range of 5.3-5.5 per cent, she said. India's WPI-based inflation, now below 3 per cent, may go below zero by April leading to a state of deflation in the economy, Bhargava said, adding, "this (negative inflation) may continue for a period of 5-6 months."

"India could see deflation by April, which can last 5-6 months. This would be a more statistical issue than a structural one...for a growing economy, deflation is not going to be a problem," Bhargava said.

The Reserve Bank, which cut rates aggressively since October, might reduce its cash reserve ratio (CRR) by 0.5 per cent in the near future to provide cushion for a sagging economy, she said.

In a bid to infuse sufficient liquidity into the market, the RBI cut its CRR and repo to 5 per cent and reverse repo to 3.5 per cent in the recent months. At present it is beneficial for the companies to buy back FCCBs as at the time of issuing these bonds they had done it at higher prices.

In fact, recently some companies, including Jubliant Organosys, Moser Baer, Mahindra and Mahindra and Reliance Communications announced buyback of FCCBs.