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Kolkata: State Bank of India led a decline in the country’s bank shares, falling to the lowest price in a month after a court decision to scrap coal-mining permits raised concerns that bad loans will surge.

India’s largest bank by assets slid 3.79% to Rs2,393.30 at 2:51 pm in Mumbai, while the 12-member S&P BSE Bankex index lost 1.8 percent. The Supreme Court on Wednesday canceled 98% of coal-mining licenses granted in the past two decades and told the government to auction the permits.

State Bank of India has Rs4,200 crore in loans to power and metal companies that will be affected by the cancellation, said Pradeep Kumar, an SBI managing director. Souring loans at those companies will heighten pressures on the banking industry, where profitability is declining amid the sharpest lending slowdown since 2009.

“There may be some impact on future cash flow at the power and metal companies," Sanjay Arya, an executive director of United Bank of India, said today in a phone interview from Kolkata. The bank, which has lent as much as Rs7,000 crore to those companies, isn’t expecting “any adverse impact immediately" on asset quality, Arya said.

The lender’s shares fell 4.1%. Union Bank of India dropped 6.1% and Punjab National Bank slid 4.3%.

Debt challenges

Many of State Bank’s loans to the power, mining and metal industries are to large businesses with high credit ratings and there’s no risk of a surge in defaults by those companies, SBI’s Kumar said by phone on Thursday.

Companies were ordered to pay Rs295 a ton on the 273.6 million metric tons of coal extracted so far, according to the Supreme Court’s ruling on Wednesday.

Banks in India have lent more than $10 billion to smaller companies that are facing debt-servicing challenges after the scrapping of permits, Adarsh Parasrampuria, a Mumbai-based analyst at Nomura Holdings Inc., wrote in a 24 September note. Despite the court ruling, default risk is limited at most of the larger power and steel companies, which have borrowings of about $67 billion, according to Parasrampuria.

Bad debts rose to 4% of total advances as of 31 March as economic growth cooled to 4.7% , compared with an average 8.3% in the previous decade. Bloomberg

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