SBI warns improving loan quality will take time

MUMBAI (Reuters) - State Bank of India, India's largest lender, warned on Friday there would be no quick fix for the country's banks, as improvements in loan quality will be gradual while a pick-up in credit demand could be a year away.

SBI, which accounts for about a quarter of loans and deposits in India, on Friday reported a 52 percent increase in provisions for bad loans in its second quarter -- a 40.3 billion rupee ($653.47 million) hit that dampened profit growth.

SBI and peers such as ICICI Bank Ltd have suffered a surge in bad loans as economic expansion in the country slowed to below 5 percent in the past two fiscal years - the worst spell of sluggish growth in quarter of a century.

Signs of a revival in economic indicators have made banks optimistic, though a high level of bad loans is widely expected to persist for the next few quarters while credit growth hovers near its slowest rate in a decade.

"When we will see asset quality is improving, I don't believe that we will really see anything very sharp because this downturn has been very deep," SBI Chairwoman Arundhati Bhattacharya told a news conference.

"Once we see the demand cycle coming back, definitely we can begin to see things happening at a faster pace," she said, adding that was still about a year away.

SBI posted a net profit of 31 billion rupees, an increase of 30.5 percent from the same period a year earlier but short of the 32.54 billion average analyst estimate in a Reuters poll.

More than two dozen state banks account for over 70 percent of advances in India - and also the bulk of the bad loans. Analysts estimate Indian lenders will need to raise as much as $110 billion over the next four years, to comply with global rules demanding stronger bank reserves as a buffer in times of crisis.

SBI's net non-performing loans as a percentage of net loans rose to 2.73 percent in the September quarter from 2.66 percent in the previous three months.

The pace of increase in bad loans slowed in the quarter, however, helping to send the stock to a five-month high.

Bhattacharya, who took the helm just over a year ago, has vowed to tackle the increase in troubled loans by boosting vigilance and upgrading systems and software.

($1 = 61.6400 rupee)

(Reporting by Devidutta Tripathy; Additional reporting by Tripti Kalro in BANGALORE; Writing by Sumeet Chatterjee; Editing by Christopher Cushing and Clara Ferreira Marques)