International rating agency Fitch on Thursday said the asset quality woes of banks are unlikely to ease any time soon and the gross non-performing assets are set to inch up to 4.4 per cent this fiscal from the likely reading of 4.2 per cent in 2012-13.
"Banks' latest results show a continued decline in the overall asset quality as the economic downturn persists...The central bank's recent rate cuts are unlikely to ease asset quality pressures to any great extent or help the banks correct their funding imbalances," Fitch said in a note.
It said infrastructure is the biggest risk for the banks during the fiscal, which will see the gross bad assets ratio climbing up to 4.4 per cent from the 4.2 per cent estimated for FY13.
Some of the banks, including the largest lender SBI, are yet to announce their March quarter results, but the few public sector lenders which announced their earnings showed mixed bag on the asset quality front. However almost all the private sector lenders reported better quality in assets.
"The long-term nature of infrastructure assets leaves banks more exposed to asset/liability mismatches, particularly as deposit-gathering has not kept pace with credit growth," the report said.
Reliance on short-term funding like certificates of deposit and bulk deposits will remain high, Fitch note said, adding the larger banks with broader deposit and financing bases are better placed than the smaller ones in tackling the difficulties.
It said the growth in restructured loans will outpace those in NPAs, but added the pace of NPA accretion is slowing due to factors like policy easing by the Reserve Bank.
However, RBI's articulated concern on inflationary pressures and the twin deficit limits the scope for further easing from the 0.25 per cent cut in key rates delivered last week, it said.
Fitch, which along with its peer S&P had downgraded the rating outlook to negative last year, said.