Rising bad debts cast shadow over bank earnings

Rising bad debts, or non-performing loans, will be in focus at Indian banks in the coming quarters as a sharper-than-expected slowdown in Asia's third-largest economy hurts jobs and corporate profits.

The Reserve Bank of India said in its annual review on Tuesday the economy probably grew 6.5-6.7 percent in the financial year ended March 31 and would slow to around 6 percent this year, much smaller than the 8.9 percent expansion over the last five years.

"In line with the deceleration in the economy, asset-quality pressure is likely to come to the fore in the current quarter," IDFC SSKI analysts said in a note last week on the Jan-March quarter.Analysts said revised restructuring norms set by the central bank should have arrested the immediate rise of gross bad debts in the March quarter, but the number will start inching up again.

Banks's gross non-performing loans will rise to 6.1 percent of total loans by 2010/11, according to Morgan Stanley. They were at 2.3 percent in 2007/08, as per the Reserve Bank of India (RBI).