Mumbai: Bad assets of India’s banks are expanding at a fast pace at a time growth in Asia’s third largest economy is slowing.

What is particularly worrying is that the pace of growth is increasing with every successive quarter. For instance, in the September quarter, the growth in gross NPAs for this set of banks was 28.28%; in the June quarter it was 19.14%, and March quarter, 17.81%.

Among the relatively large banks, gross NPAs of at least four banks—ICICI Bank Ltd, Union Bank of India, Central Bank of India and UCO Bank—in the December quarter were between 3.82% and 3.33% of their loan books. After setting aside money, their net NPAs were lower—between 2.04% and 0.83%.

This pace of bad loan growth in the three months ended 31 December was the fastest in at least the last five years. In this quarter, these 34 banks added Rs 3,919 crore of bad loans.

India has 40 listed banks but the analysis has excluded six. Three banks—State Bank of India, Dena Bank and Dhanlaxmi Bank Ltd—are yet to declare December quarter results. Five-year data is not available for United Bank of India, Central Bank and Punjab and Sind Bank as they were listed recently.

Rising bad loans are a concern for banks as they have to set aside more money in the form of provisions to cover such loans. The higher this amount, the more is the impact on profits.

Experts point to a sharp rise in interest rates and snail-paced reforms in key sectors such as mining, and land acquisition, as the key reasons for a jump in bad assets.

To arrest persistently high inflation, the Reserve Bank of India (RBI) hiked its key rates 13 times since March 2010, from 3.5% to 8.5%, forcing banks to hike lending rates at least by 225 basis points in the last one year. One basis point is one-hundredth of a percentage point.

High inflation and successive rate hikes have raised interest burden on corporations, impacted their ability to service loans, and made it difficult even for individuals to repay loans. The stress has been most visible in interest-rate sensitive sectors such as infrastructure, retail and textiles.

RBI, in its January review of the monetary policy, lowered its projection for growth in India’s gross domestic product to 7% from 7.6% earlier for the fiscal.

In the first half of the fiscal year, the Indian economy grew at 7.3%, but it has been losing momentum and the growth in the second quarter sharply declined to 6.9% from 7.7% in the first quarter.

Bankers admitted bad loans are rising, but refused to acknowledge any alarming signals at this stage. “Clearly some sectors will have issues for the banking system, but as we see it, the NPAs will steadily come down from December,” said M.V. Nair, chairman and managing director of Union Bank.

RBI, in its latest financial stability report in December, said banks can handle shocks to the system, even when bad debts rise 150% from current levels.

“The banking sector remained resilient even under severe credit risk stress scenarios, though a few individual banks could come under duress,” the report said. RBI identified agriculture, power, realty and telecom as the sectors responsible for most bad loans.

“It isn’t right to say RBI is overtly concerned. Yes, some concerns will be there, but when NPAs are below 3% despite volatile economic conditions, why are we making so much of it?” asks Nair.

Besides, the overall slowdown in the economy, a shift to system-driven NPA calculation also led to a rise in bad debts, bankers said. Banks used to make temporary adjustments to retain quality of assets but now if the interest is due for 90 days, an account automatically becomes NPA.

“The rise in NPA is because there is some stress in bigger accounts, which we did not see earlier. Also, the system is throwing some NPA numbers... Since most of the accounts have already migrated and been fed into the system, these numbers won’t be seen in the coming days,” Bhaskar Sen, chairman of United Bank, said. “We are quite firm on recovering NPAs. Recovery process is robust now and we are taking legal action.”

Bank of Baroda chairman and managing director M.D. Mallya is also confident that the bad loan levels of Indian banks will improve in line with an economic recovery. “The NPA numbers are higher because of the prevailing economic conditions, but there is nothing to worry about and in the coming quarters we are expecting better stability in slippages,” he said.

Among the sectors that have mainly contributed to NPAs, besides a slowdown in demand, a sharp fall in prices have hurt the textile sector, while in power, the absence of periodic tariff revisions have caused stress, bankers said.

D.K. Joshi, chief economist at rating agency Crisil Ltd, said lack of reforms and high inflation could pose threat to the asset of quality of banks. “We are seeing demand dampening in the sector because of high interest rate. Some sectors like mining are also impacted by the lack of policy reforms. If the government takes credible steps to contain inflation and remove impediments to improve the productive capacity of the economy, it can help the overall performance of the sectors,” Joshi said.

“We’ve to live with high NPAs,” said K.N. Rahaman, deputy research head at Mumbai-based Way2Wealth Brokers Pvt. Ltd. “Policy reforms that facilitate investments are critical. For instance, for the aviation sector, we do not have a favourable policy, so is the case in textiles. Other interest rate-sensitive sectors such as infrastructure are also vulnerable to project sanctions and execution delay.”

Investors, however, don’t seem to be too perturbed. This year, the Bankex, the banking industry’s index, has risen 27.21% against the Sensex’s 13.91% rise. At least four bank stocks—UCO, United Bank, Dena Bank and Allahabad Bank —have risen 50% or more since January.

Ashwin Ramarathinam and Ravindra Sonavane contributed to this report.

dinesh.n@livemint.com