Soaring NPLs pound Indian banks’ bottom line

Worst is yet to come.

Non-performing loans are rising rapidly as India’s battered economy stalls. On the other hand, rising bond yields make it tougher for banks to absorb credit losses from current earnings.

State Bank of India shares fell 3.4% in Mumbai on Aug. 12 after surging bad loans at India’s largest lender caused a 14% fall in its quarterly net income.

Gross NPLs at India's top 10 government-owned banks doubled over the past two years to US$24 billion. Bad debt provisions among banks will cover about half the NPLs but taking care of the remaining half is expected to wipe out one year of operating income.

The rise in 10-year government bond yields since May will leave lenders that own a big chunk of government debt with huge losses. The Reserve Bank of India’s recent monetary-tightening efforts to halt the 12% slide in the rupee since April sent the yield on three-month treasury bills soaring to 10.9%, compared to 8.3% on 10-year government bonds.