Bad loans weigh on India's top banks

By Narayanan Somasundaram

MUMBAI (Reuters) - India's two leading banks posted better-than-expected profits on Monday but State Bank of India's shares tumbled to a 18-month low after it increased provisions for bad debts and forecast narrower interest margins.

ICICI Bank, which has been hammered this year on concerns about its exposure to the global crisis, posted a small increase in profit, when a fall had been expected, and said it sold its non-Indian credit derivatives portfolio.

SBI's provisions for bad debts rose to 9.11 billion rupees (118 million pounds) in the fiscal second quarter ended September from 2.47 billion rupees in the previous quarter, largely due to a government waiver of small farmers' debts.

Chairman O.P. Bhatt said the state-run bank's net interest margins had peaked and would be a little lower in the next quarter, but he added the bank wanted to keep these above 3 percent. Net interest margins, a key measure of efficiency, were at 3.16 percent in the quarter.

"There is a slowdown. But it's not that slow yet," he said.

Two analysts with local brokerages said SBI added 11.4 billion rupees to its gross bad loans between June and September, signifying stress was building up on its loan book.

Bhatt said the bank, which along with its associates controls a quarter of the Indian banking sector, hoped to post loan growth of 26 percent in the fiscal year ending March 2009.

"The slippages are a cause for concern given the economic slowdown. Going forward, the market is convinced SBI may not be able to get the best out of its other revenue streams," V.K. Sharma, head of research at Anagram Stock Broking, said.