Mumbai: Indian lenders continue to report higher bad loans in the quarter ended 31 March, wiping out profits of many large and mid-sized banks.

Five of the six banks that reported earnings on Friday—all state-owned lenders—reported a loss for the last and fourth quarter of fiscal 2016, while one reported a sharp fall in profit.

The pain may have been more severe if it wasn’t for a write-back of tax credits that most banks used to ease the pressure from the higher provisions needed to cover the loans classified as non-performing assets (NPAs).

The country’s lenders are in the middle of a massive clean-up under the directive of the Reserve Bank of India (RBI). The banking regulator has asked banks to classify visibly stressed assets as non-performing assets (NPAs), provide for them in the balance sheet and strengthen it by March 2017. A bulk of the pain of this clean-up has been taken in the December and March 2015 quarters.

So far, 25 of 39 listed banks have reported their March quarter earnings. For this set of banks, the gross NPAs have risen by 22% between the December and March quarters and by 85% on a year-on-year basis. The aggregate gross bad loan for the 25 banks now stands at 2.43 trillion, compared with 1.98 trillion at the end of the December quarter. Provisions, or the money set apart to cover the risk of loan default, have surged 23%, sequentially, pushing down profits. The aggregate profit reported by the 25 banks fell to 2,363 crore in the March quarter compared with 4,235 crore in the December quarter. The fall in profits is much steeper when compared with the year-ago quarter. In the March 2015 quarter, these banks had reported 12,527 crore in net profit.

“We are in a space where there is a heightened sense that borrower has to pay up. With the new bankruptcy rule and the proposed critical changes to the DRT and Sarfaesi, we are getting into an environment where borrowers are being asked to be more responsible," said P.S. Jayakumar, managing director and chief executive officer (CEO), Bank of Baroda.

“We are all working with the assumption that NPAs have peaked. That’s what the data seems to show," he said.

Bank of Baroda reported a net loss of 3,230.14 crore for the March quarter, the second consecutive quarter of losses. In the December quarter, it reported a loss of 3,342.04 crore. The lender reported a profit of 598.35 crore in the year-ago quarter.

Gross NPAs surged to 40,521.04 crore at the end of the March quarter from 38,934.11 in the December quarter and 16,261.45 crore a year ago. As a percentage of total assets, the bank’s gross NPAs rose to 9.99%, compared with 9.68% in the previous quarter. While bad loans continued to rise, the pace of increase in such loans slowed compared with what was seen in the December quarter.

Bank of Baroda set aside 6,857.66 crore as provisions against bad loans, compared with 6,164.55 crore in the December quarter and 1,817.50 crore in the year-ago quarter.

“The slippages haven’t slowed and that is a matter of concern. However, the bank has provisioned aggressively and increased provision coverage ratio to over 60% which will help provide a buffer in the new fiscal year," said Siddharth Purohit, an analyst at Angel Broking Pvt. Ltd.

The earnings reported by most lenders point to the fact that the problem of bad loans is a systemic one. Speaking at an event organized by the Chicago Booth Business School in London on Friday, Raghuram Rajan, the RBI governor, said, “(Non-performing loans) is an issue, but we have acted early enough on these concerns; so it’s manageable." Separately, while speaking to business news channel CNBC, Rajan ruled out a “Lehman moment" in India.

At certain banks, though, the problem is acute with bad loans soaring well above 10% of total loans. In the past, when a bank’s NPAs have crossed 10%, RBI has asked them to cut lending and consolidate operations. It is not clear whether RBI will do the same this time.

At Central Bank of India, the percentage of gross NPAs jumped to 11.95% at the end of the March quarter as compared with 8.95% in the previous quarter and 6.09% in the year-ago quarter.

The bank reported a net loss of 898.04 crore for the March quarter, compared with a loss of 835.52 crore in the December quarter and a profit of 174.29 crore in the March 2015 quarter.

Kolkata-based UCO Bank saw its gross NPAs surge to 15.43% as compared with 10.98% in the previous quarter and 6.76% in the year-ago period. Provisions to cover bad loans more than doubled and led the bank to report a net loss of 1,715.16 crore. The bank reported a profit of 209.28 crore a year ago.

At Allahabad Bank, the reported loss stood at 581.13 crore for the March quarter, against a profit of 202.63 crore a year ago.

Gross NPAs stood at 9.76% at the end of the March quarter, compared with 6.4% in the previous quarter and 5.46% in the year-ago quarter.

Union Bank of India reported a 78.34% fall in net profit in the March quarter but managed to remain profitable due to a tax write-back. The bank reported a profit of 96.12 crore, compared with 443.77 crore a year ago. As a percentage of total loans, gross NPAs stood at 8.7% at the end of the March quarter, compared with 7.05% in the previous quarter and 4.96% in the year-ago quarter.

Dena Bank reported a net loss of 326.38 crore for the March quarter following a loss of 662.85 crore in the December quarter. The lender reported a profit of 55.82 crore in the March 2015 quarter. Gross NPAs stood at 9.98% at the end of the March quarter, compared with 9.85% in the previous quarter and 5.45% in the year-ago quarter.

Despite the large amount of loans already recognized as NPAs in the December and the March quarters, investors and analysts are not sure if the worst is over.

“Consensus estimates for overall impaired assets in the Indian banking system seem to be in the range of 15-18%. Clearly, the reported numbers on NPLs are a long way off Street estimates despite a steep increase in reported NPLs in the past two quarters," said Kotak Institutional Equities in a 13 May report.

“Certain banks have made additional disclosures on potential stressed accounts based on their internal classifications. However, we believe more disclosures in a standard and verifiable format (SMA-2 accounts) by the banking system will help put a line under NPLs once and for all. The banking system can then focus its energy on the recovery of bad loans rather than on ‘messaging’," the report added.

SMA, or special mention accounts, are those where payments are delayed.

The accounts where the payments are due by more than 30 days fall in the SMA-1 category, while those where the payments are due by more than 60 days fall in the SMA-2 category.

Ravindra Sonavane contributed to this report.

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