Indian banks' sour loans hit a record 9.5 trillion rupees ($145.56 billion) at the end of June, unpublished data shows, suggesting Asia's third-largest economy is no nearer to bringing its bad debt problems under control.
A review of Reserve Bank of India (RBI) data obtained through right-to-information requests shows banks' total stressed loans - including non-performing and restructured or rolled over loans - rose 4.5 percent in the six months to end-June. In the previous six months they had risen 5.8 percent.
While banks remain the main source of funding for India's companies, the stubborn bad debt problem has eaten into bank profits and choked off new lending, especially to smaller firms, at a time when an economy that depends on them is stalling.
India grew at its slowest pace in three years in April-June — a concern for the government of Prime Minister Narendra Modi, who faces elections in 2019 and has pledged to create millions of new jobs before then.
Banks are having to take higher provisions to account for more defaulters being pushed into bankruptcy. And margins are likely to be squeezed further by proposed new rules to encourage commercial banks to pass on central bank interest rate cuts.
To be sure, the bulk of India's sour loans are in the state banks and stem from lending to large conglomerates, especially in steel and infrastructure. But analysts say the rise in bad loans among small firms, and even retail borrowing, is worrying and will do little to encourage new loans to help fuel growth.
"On the corporate side, we think it's a recognition cycle which is nearing an end," said Alka Anbarasu, senior analyst at Moody's Investor Service, referring to more bad loans being recognized as such, as banks come under pressure from the RBI and other regulators. "But it's really those data points beyond corporate that are causing some worry."
Anbarasu forecast weak quarters ahead for banks before profitability picks up, and several senior bankers from public sector lenders - which account for more than two-thirds of Indian banking assets - agreed the months ahead would be strained.
Stressed loans as a percentage of total loans reached 12.6 percent at end-June, according to the RBI data, the highest level in at least 15 years.