Mumbai: The hefty requirement of money to cover rising bad debt dragged down the third-quarter earnings of two large public sector lenders on Friday.

Mumbai-based Bank of India’s (BoI) third-quarter profit rose 9.6% to Rs 718.15 crore. The country’s fourth largest public sector bank reported a 168.55% rise in provisioning for bad debt—Rs 333 crore in the quarter. Overall, total provisions rose 39% to to Rs 693.07 crore.

Debt hit: Bank of India chairman and managing director Alok Misra (left) and Canara Bank chairman and managing director S. Raman.

The bank’s total interest earned rose 30.77% to Rs 7,150.12 crore. Net interest income, or the interest earned minus interest expended, rose 4.06% to Rs 2,067.5 crore.

The net interest margin (NIM) of the bank, a key gauge of profitability, dropped to 2.55% in the third quarter from 3.09% a year ago. Alok Misra, BoI’s chairman and managing director, expects the full-year NIM at 3%.

According to Misra, the bank’s focus area will be to garner more business from retail loans, mid-size companies and agriculture, and not big firms.

“Asset quality, credit monitoring, current and savings account growth will drive our business with special focus on customer services,” said Misra.

The fifth largest public sector lender by assets, Bangalore-based Canara Bank, reported a 21% decline in net profit to Rs 875.56 crore for the third quarter on account of high provisioning for bad debt.

Provisions other than tax and contingencies rose 218.65% to Rs 501.18 crore from the year earlier. After provisions, the net NPAs of the bank stood at 1.49% against 1.05%.

The total income of the lender rose to Rs 8,591.15 crore from Rs 6,444.55 crore.

The bank’s NIM was 2.64%, nearly flat from a year ago, chairman and managing director S. Raman said in a television interview. Fresh slippages in the quarter stood at Rs 862 crore.

Banks that have announced their results so far have shown a sharp increase in bad debt provisions.

According to BoI’s Misra, the spike in provisions is because of a few large accounts turning bad and not a reflection on the state of the overall economy.

Although he did not mention names, analysts said the bulk of the bad debt can be attributed to the airline industry.

Misra said the bank is seeing stress from the aviation, textiles, steel and power sectors.

BoI shares rose 3.17% to Rs 352.85 on Friday on the Bombay Stock Exchange even as the benchmark Sensex gained 0.92% to close at 17,233.98 points. Canara Bank lost 3.23% to close at Rs 464.45. The exchange banking index, the Bankex, lost 0.37%.

Since the beginning of this year, banks as well as other rate-sensitive stocks such as capital goods, real estate and automobiles have outperformed the Sensex on the expectation that the cost of money will come down and India’s central bank will start reversing the stance of its monetary policy.

PTI contributed to this story.

anup.r@livemint.com