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Rising bad debts cast shadow over bank earnings

Rising bad debts,or non-performing loans,will be in focus at Indian banks in the coming quarters.

State Bank of India,the country’s largest lender,is expected to post a 16.3 per cent rise in quarterly net profit on strong loan growth,but rival ICICI Bank could see profit slump by a third on consumer defaults.

Rising bad debts,or non-performing loans,will be in focus at Indian banks in the coming quarters as a sharper-than-expected slowdown in Asia’s third-largest economy hurts jobs and corporate profits.

The Reserve Bank of India said in its annual review on Tuesday the economy probably grew 6.5-6.7 per cent in the financial year ended March 31 and would slow to around 6 per cent this year,much smaller than the 8.9 per cent expansion over the last five years.

“In line with the deceleration in the economy,asset-quality pressure is likely to come to the fore in the current quarter,” IDFC SSKI analysts said in a note last week on the Jan-March quarter.

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Analysts said revised restructuring norms set by the central bank should have arrested the immediate rise of gross bad debts in the March quarter,but the number will start inching up again.

Banks’s gross non-performing loans will rise to 6.1 per cent of total loans by 2010/11,according to Morgan Stanley. They were at 2.3 per cent in 2007/08,as per the Reserve Bank of India (RBI).

Mounting consumer defaults are expected to hit ICICI Bank harder because it has a greater exposure to retail loans.


State Bank,which along with its associates controls a quarter of the Indian banking deposits and loans,said its net bad debts rose 22 per cent in the December quarter while ICICI’s shot up by more than a third.

Sluggish demand for loans will also skew ratios as defaults begin to accumulate at a faster clip. Indian banks’ loans grew 17.3 per cent in the 12 months till late March,lower than the prior three years which saw 30 per cent expansion a year.

The RBI cut rates on Tuesday for the sixth time in 7 months and urged lenders to follow suit to bolster growth. But analysts say risk-averse banks are unlikely to step up loans and will continue putting surplus cash in government securities.


Banks invested 356 billion rupees ($7 billion) in government securities during Jan-March,and parked an average of 5 billion rupees a day with the central bank’s reverse repo,representing a faster growth than their loan book,brokerage Motilal Oswal said.

Shares of State Bank are down 4 per cent and those of ICICI have fallen 9 per cent so far this year,compared with a 13.5 per cent rise in the benchmark index and a 2.5 per cent drop in the bank index over the same period.

First published on: 23-04-2009 at 12:57 IST
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