Mumbai: Government-owned IDBI Bank Ltd posted a 28% drop in net profit in the quarter ended 31 March, hit by a more than 10-fold increase in provisions for bad loans.

Profit fell to 554 crore in the fiscal fourth quarter from 771 crore in the year-ago period. The bank set aside 670 crore to cover bad loans, up from 63 crore a year earlier, when it had benefited from a writeback of provisions that it had made in previous quarters. Provisions to cover restructured advances rose to 150 crore from 100 crore.

“There were high provisions made on two, three large corporate accounts during the quarter, which impacted the earnings," executive director R.K. Bansal said. “There was a rush to restructure advances in the fourth quarter as the provisioning requirement for restructured loans will go up from the new fiscal."

A slump in economic growth, which is estimated at a decade’s low of 5% in the year ended 31 March, and high borrowing costs have made it difficult for borrowers to repay debt, hurting the asset quality of some banks. Economic growth is expected to gain momentum this year as the Reserve Bank of India cuts its policy rates to lower borrowing costs and spur corporate investment.

Under the norms, banks need to set aside 2.75% of the loan amount as provisions when they restructure an asset. The Reserve Bank of India (RBI) has raised the provisioning requirement for fresh restructured loans to 5% of the loan amount in the new fiscal year. Higher provisions hurt the profitability of banks.

Bansal is optimistic that the burden of non-performing assets, or bad loans, and restructured assets will begin easing in the coming months. “My feeling is that most of the NPAs have peaked and restructured loan cases are over. But a lot will depend on the recovery in the economy," Bansal said.

The bank’s fee income rose to 875 crore in the quarter from 653 crore in the year-ago period, an increase of 34%, which supported earnings, Bansal said. Net interest income, or interest earned minus interest expended, rose to 1,440 crore, up 18.92%, from 1,211 crore in the year-earlier quarter. The net interest margin, or the spread between interest rate charged on loans and interest paid for funds, widened to 2.19% as of end-March from 2.07% a year ago.

Deposits of the lender increased to 2.3 trillion at March end from 2.1 trillion in the year-ago period, a rise of 7.9%. Advances increased 8.71% to 1.96 trillion from 1.8 trillion.

Operating profit rose 32.4% to 1,594 crore from 1,204 crore.

Analysts said the earnings outlook for the bank in the coming quarters is depressed because of continuing stress on loan quality.

“The bank is likely to face challenges on the bad loan front in the approaching quarters as well," said an analyst with a Mumbai-based brokerage who requested anonymity.

IDBI Bank gained 1.49% to Rs.88.35 on a day the BSE’s benchmark Sensex rose 1.19% to 19,406.85.