The Indian economy grew by 7.3% in FY15 as compared to 6.9% in FY14. The growth in GDP in FY15 was driven by higher contribution from manufacturing, electricity and financial, real estate and professional services. Sectors like agriculture, forestry & fishing and mining & quarrying were the weak performers in FY15.

Taking advantage of the subdued inflation, RBI cut repo rate by 75 bps in three tranches of 25 bps from January 2015 up till June 2015 to stimulate the economy. Factors like slowdown in economy, high interest rates, high leverage of the corporate sector, lack of investment in new projects, capital constraints for PSU banks, higher NPAs and assets challenge of restructured led to low credit off-take, according to CARE Ratings.

On deterioration of asset quality, CARE Ratings said, "The Gross Non-Performing Assets (NPAs) of the banks showed 24% (y-o-y) increase in FY15 compared with 36% in FY14. Overall Gross NPA ratio for the banks stood at 4.37% and net NPA ratio stood at 2.48% as on March 31, 2015. The major sectors that have added to the asset quality stress are mining, iron & steel, textiles, infrastructure and aviation."

The credit growth of scheduled commercial banks (SCBs) stood at 9.2% on March 20, 2015 on a y-o-y basis, which was lower than 14.5% witnessed a year ago. There has been a clear decline in growth rates in industries and services. As on March 20, 2015, SCBs showed a y-o-y deposits growth of 10.9% as compared to 14.6% a year ago.

Profitability has taken a hit for public sector banks under study due to margin compression and asset quality deterioration. However for private sector banks, profitability is stable.

Public sector banks showed almost no growth in PAT during FY15 as compared to de-growth of 27% during FY14. De-growth in PAT in FY14 was driven by loss reported by two public sector banks. Public sector banks other than the State Bank of India (SBI) group reported de-growth of 9.1% during FY15 as compared to de-growth of 29% during FY14.
 
The Government has announced a capital infusion of Rs.70,000 crore for PSU banks over the next four years with Rs.25,000 crore to be infused in FY16. This comes as a positive move since the budgeted allocation of Rs.7,940 crore was inadequate.

"Current infusion plan may help in providing some growth capital for the banks in FY16. However, given the fact that the provision coverage ratio is low for most of the PSU banks, additional capital will be required to provide sufficient cover for stressed assets," CARE opined.

CARE expects another 25 bps cut in the repo rate in the second half of FY16 depending on the eventuality and spread of monsoon, movement in inflation and the timing and impact of the interest rate hike by the Federal Reserve Bank in the USA.