State Bank of India strives to stave off bad debt tsunami

Bad debts sour the outlook for India’s largest lender despite a 138% rise in net profit in the three months ended June 30.

State Bank of India said its net income jumped to US$677 million from US$284 million during the period, beating analysts’ estimates. Despite this massive increase, SBI shares fell to the lowest in almost three months last week on concerns that India’s weakest growth in nine years would boost the bank’s bad debts and erode profits.

The least monsoon rains since 2009 also fanned fears of a drought that could lead to massive loan defaults by farmers, which constitute 13% of the bank’s total lending.

SBI’s gross bad loan ratio increased to 4.99% during the quarter from 3.52% a year earlier. Chairman Pratip C. Chaudhuri, however, believes this might be reduced to 4.75% during the third quarter,

He previously said SBI will focus on recovering payments from defaulters and will take steps to prevent further debt increases.

“We should be seeing strong recovery of bad loans in the second and third quarter,” he said. “High net profits are the new norm.”

Analysts, however, contend that asset quality remains a major concern for SBI.

“A large part of the new bad loans should be from agriculture and loans to companies. We remain skeptical regarding the bank’s ability to bring down bad loans in rest of the year,” said Vishal Narnolia, an analyst at SMC Global Securities Ltd.

The bad news about the economy also weighs heavily on SBI’s outlook for the year. The Reserve Bank of India, the central bank, cut its forecast for expansion in India’s US$1.8 trillion economy to 6.5% in the 12 months through March from an earlier estimate of 7.3%.

Economic expansion slowed to a low of 5.3% for the past 10 years in the three months ended March as Europe’s debt crisis curbed exports while investments slowed and inflation rose.