Bank of India’s sudden acceleration in bad asset recognition is a good example of the shallowness of the current economic recovery. In the last three quarters, including July-September, the bank had average slippages of 6,400 crore.

Its gross bad loan ratio has more than doubled in the last four quarters from 3.54% to 7.6% at the end of September. That is not all. In the past three quarters, the bank has restructured loans worth 3,000 crore, though this was largely in the March quarter. Besides, the lender has refinanced loans worth 5,000 crore under the 5/25 scheme.

While this doesn’t necessarily mean that those loans were going bad, it points to underlying stress. Note that this sudden rise in bad loans has come from industry and services. In the former category, the gross bad loan ratio has increased to 15.82%, double that of a year ago. In services, the increase has been similar from 3.2% a year earlier to 7.88% now.

A restructured loan portfolio that is about 4% of advances, and this amount of refinancing, are huge red flags for asset quality in the coming quarters as well. Typically, as much as one in three recast loans slips into the non-performing asset (NPA) category.

This setback couldn’t have come at a worse time. Bank of India’s capital adequacy ratio is insufficient to boost growth. In the September quarter, its advances shrank about 0.8% as domestic loans grew a tepid 3.7% and overseas credit contracted.

The bank’s common tier I equity ratio is 7.6% and tier I capital adequacy ratio is 8.65%. The net NPA ratio of 4.3% and restructured asset pile will likely stretch the bank’s capital base, preventing it from expanding its loan book.

The possibility of further slippages would act as a check on profitability in the coming quarters, too. In the September quarter, provisions, which doubled to 3,200 crore, and an extra 450 crore set aside for loss on sales to asset reconstruction companies led to Bank of India’s second loss in three quarters. It made a loss of 1,126 crore in the September quarter, far from Street consensus forecasts of 379 crore profit.

A further dent in profitability will prevent the lender from bolstering its capital base from accumulated profits, requiring an equity dilution. Bank of India is already trading at one-third its book value for fiscal year 2016. The stock fell 1.01% on BSE on Tuesday. Investors should be warned there are no silver linings visible at present.

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