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India's banks have a bad loan problem, but financial experts still see opportunity

  • India's private banks offer "strong" returns on investment, Rashmi Gupta, emerging markets multi-asset portfolio manager at J.P. Morgan Private Bank, told CNBC.
  • The stock of bad loans in the Indian banking system ticked slightly down from 9.5 trillion rupees ($149.43 billion) in June last year to 9.46 trillion rupees ($148.71 billion) at the end of September, Reuters reported.
  • India's economy has yielded positive news recently.
Bank employees protest banking reform on September 15, 2017, in New Delhi, India.
Ravi Choudhary | Hindustan Times | Getty Images
Bank employees protest banking reform on September 15, 2017, in New Delhi, India.

Indian banks may have scared off some investors with the sector's bad loan problem, but financial experts told CNBC they're positive on Indian lenders.

That's thanks to the government's economic management, they said, adding that it was still important to differentiate within the sector.

On the one hand, India's private banks offer "strong" returns on investment, Rashmi Gupta, emerging markets multi-asset portfolio manager at J.P. Morgan Private Bank, told CNBC. "Many of them are considered well run with capable management teams," she added.

Meanwhile, India's state banks are largely plagued with high levels of stressed (non-performing, restructured or rolled-over) loans. Those assets amounted to 8.25 trillion rupees ($130 billion) for India's 21 state lenders at the end of September 2017, Reuters reported earlier this year.

Still, the overall stock of bad loans in the Indian banking system ticked slightly down from 9.5 trillion rupees ($149.43 billion) in June last year to 9.46 trillion rupees ($148.71 billion) at the end of September, Reuters reported.

That shift could accelerate from Indian government moves to improve the sector. For example, New Delhi announced last October that it would recapitalize state banks to the equivalent of $32 billion.

"The overall opportunity for allocations to banks/financials in India may now be widening and our view for overall growth driven by domestic recovery remains well supported," Gupta said.

"The recap should also free up the ability of state banks to lend, which should support growth, particularly in rural segments of the country, which is where the state-owned banks tend to play a bigger role," she added.

India's macroeconomic picture has yielded positive news recently. On Monday, the government announced that its economic growth for the coming fiscal year would reach between 7.0 and 7.5 percent, meaning that India would regain its title as the world's fastest growing major economy.

Additionally, India's private sector is "one of the least leveraged, which should put its financials in the spotlight," Renata Klita, senior equity analyst at investment firm London and Capital, told CNBC.

Watch: India's economic reform initiatives are paying off