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New Delhi: India’s banks are accumulating bad and doubtful loans at a faster pace as the economy slows, and the trend may accelerate next year as small and medium enterprises (SMEs) and households struggle to pay debts, bankers and economists say.

A Mint analysis shows that in the quarter ended 30 September, the combined gross non-performing assets (NPAs) at the top 10 banks by market capital rose 7% from the preceding quarter to Rs35,290 crore. The pace quickened from a quarter-on-quarter rise of 1.25% to Rs32,982 crore in the preceding three months.

Year-on-year, the gross NPAs at State Bank of India, ICICI Bank Ltd, HDFC Bank Ltd, Kotak Mahindra Bank Ltd, Axis Bank Ltd, Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank and Union Bank of India shot up 14.5%.

Loans on which no principal or interest has been paid for at least 90 days are classified as non-performing under Indian banking rules. Gross NPAs include loans against which banks have set aside money to cover the risk of default.

Also See Accumulation of Bad Debts (Graphic)

Among these 10 lenders, the gross NPAs of public sector banks that have relatively less exposure to unsecured loans rose 4.8% in the three months ended 30 September from the preceding quarter, compared with an 11% increase at their private sector counterparts.

Net NPAs at the 10 banks—excluding loans against which banks have set aside money—rose by around 3.5% to Rs14,943 crore in the quarter ended September, swinging from a drop of 1% to Rs14,436 crore in the previous three months. Net NPAs jumped 6.5% from Rs14,023 crore a year earlier.

India’s economic expansion is slowing under the impact of a credit crisis resulting from the global financial turmoil, prompting a cut in growth forecasts. Tight credit markets and high borrowing costs have caused companies to put investments on hold. The economy, Asia’s third largest, grew 9.1% last year and averaged an annual pace of 8.9% over the last four years.

The International Monetary Fund has estimated the country’s growth in 2008 will slow to 7.8%, and in 2009 to 6.3%.

Bank NPAs will likely increase as a fallout from higher borrowing costs and the liquidity crisis that the central bank has been trying to loosen by infusing more money into the financial system and cutting its policy rate. Banks have been tightening lending to SMEs and consumers seen to be most vulnerable.

“This usually happens in any economy that grows at 9% and then slows down," said Jahangir Aziz, chief economist at financial services firm JPMorgan Chase and Co. “But the question remains: are our banks prepared for it as for the past four years they have been watching the growth in the economy?"

Private sector banks that have greater exposure to non-collateralized loans such as personal loans and credit card lending are at greater risk of being hit by consumer defaults, analysts say.

At ICICI Bank, India’s largest private sector lender, gross NPAs rose to Rs9,501 crore in the quarter ended September from Rs8,511 crore in the June quarter and at its closest rival, HDFC Bank, jumped to Rs1,675 crore from Rs1,502 crore, respectively. “We are not seeing any significant deterioration in NPAs," an ICICI Bank spokesperson said. “In fact, the specific provisions on retail (loans) have been lower by Rs10 crore in second quarter compared with the first quarter."

Gross NPAs increased in the second quarter, but less than they did in the first, as the bank tightened its lending, the spokesperson said.

HDFC Bank executive director Paresh Sukthankar said the lender’s gross NPAs had increased to 1.6% of loans from 1.4% as a result of its merger with Centurion Bank of Punjab announced earlier this year.

“Net NPAs are now at 0.57% and the total coverage ratio, including general provisions, remains at over 100% of the NPAs," Sukthankar said. “While NPA generation for wholesale loans in the past few years has been low, over the next year or two, if the economy slows down further, one could expect some increase in defaults in the SME segment."

A Mint analysis of 38 listed banks shows that their total gross NPAs rose by around 3% in the quarter ended September compared with 1% in the previous quarter.

Until this year’s crisis dawned, India’s banks had been reducing NPAs by using profits they earned during the boom years to write off bad loans and boost provisions. Reserve Bank of India data shows that between 2003 and 2007, net NPAs of public and private sector banks fell considerably.

At ICICI Bank, the net NPA ratio fell to 1.02% from 2.21% during the period, and has bounced back to 1.91%.

Given the rise in bad debts, finance minister P. Chidambaram’s directive to banks to lend more at lower rates may create further problems for the lenders, who had recently tightened credit for fear of defaults piling up.

Several public sector banks, including State Bank of India, the nation’s largest lender by assets, have announced a cut in their prime lending rates, or the rate at which they lend to their best borrowers, by 0.75%.

“Sudden economic slowdown has caused banks to shy away from taking credit exposure," said Bhavesh Parikh, director of financial services at audit and consulting firm KPMG. “They might face problem on account of availability of funds. Next year or so we might see many companies slipping down to sub-standard category (of borrowers)...resulting in jump in non-performing assets."

A senior Union Bank of India official, who didn’t want to be named, said banks needed to strengthen monitoring of their loan portfolios to check any rise in bad debts and couldn’t shut off credit taps.

“Credit flow is needed, which can support the system at this critical point of time," this official said.

Ashwin Ramarathinam and PTI contributed to this story.

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