Indian Banks’ Bad Loans May More Than Double, RBI Says

Indian lenders’ bad loans may more than double by 2013 in a “severe risk” scenario, the Reserve Bank of India said in a report today.

Soured loans may jump to as much as 5.8 percent of total advances within two years under such strained conditions, from 2.8 percent in September, according to the central bank report. The ratio is expected to climb to 3.2 percent to 3.5 percent by March 2013 under a baseline scenario, it said.

India’s economy last quarter grew at the slowest pace in more than two years after the central bank raised interest rates by a record to tame the fastest inflation among so-called BRIC nations, the world’s largest emerging markets. Credit growth in India fell to a 20-month low of 17.73 percent in November, data compiled by the Reserve Bank of India shows.

“While markets have already factored in some rise in bad loans, the higher projections made by the Reserve Bank will definitely weigh on investors’ sentiment,” Sandeep Jain, a banking analyst at IDBI Capital Market Services Ltd. in Mumbai, said by telephone today. “A spike in bad loans will be a drag on the banks’ profits as the provisioning requirements will move in tandem with the asset quality.”

The Bankex index, which tracks 14 Indian banks, rose 2.3 percent at close in Mumbai trading, limiting its decline this year to 28 percent.

Moody’s Investors Service downgraded the outlook for India’s banking system last month to “negative,” saying a domestic economic slowdown and the surge in borrowing costs may boost bad loans.

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