State banks' face bad loans as biggest challenge: Chidambaram

By Manoj Kumar

NEW DELHI (Reuters) - State-run banks face rising bad loans as their biggest challenge, expected to be slightly higher by March-end from a year earlier, Finance Minister P. Chidambaram said on Wednesday as the economic slowdown hits the state-contolled banking sector.

Rising bad loans, especially among state-run banks, have become a key concern for lenders. A state-run lender, United Bank of India , recently saw a huge surge in its non-performing loans, triggering worries over its capital needs.

"Biggest challenge facing the public sector banks is NPAs and their asset qualities," Chidambaram said after reviewing the quarterly performance of state-run banks.

"It will be little higher. Let us wait and see."

Policy makers say high inflation, delays in major projects and an economic slowdown have led to a rise in banks' bad loans as Asia's third largest economy slows to a decade low of less than 5 percent growth for the second straight year.

Stressed loans in India - those categorised as bad and restructured - total $100 billion, or about 10 percent of all loans. Fitch Ratings expects stressed assets to reach 14 percent of loans by March 2015.

The non-performing assets or bad loans of the state-run banks are likely to be higher in the current fiscal year ending in March, compared with the previous year's level of 3.84 percent, Finance Minister P.Chidambaram told reporters.

Chidambaram said bad loans had come down in the real estate sector, but were still high among the large corporate and small industries.

State-run banks like State Bank of India (SBI) , Punjab National Bank and Canara Bank have disappointed with their quarterly results due to an increase in defaults by companies battling falls in cash flows.

"Any sharp pullback in delinquencies is unlikely as corporate leverage today is significantly higher than in 2008 and it may take a few years of elevated growth before leverage turns comfortable," Fitch said in its banking outlook 2014 report released on January 30.

Last month, India's central bank issued directions to banks to take steps to rein in bad loans, including asking promoters of the companies to suffer the first loss instead of banks.

Chidambaram said state-run banks had recovered bad loans worth 189.33 billion rupees during April to December.

CAPITAL INFUSION

Officials say the government would need to infuse more capital into state-run banks to contain the impact of growing bad debts as well as asking banks to partially write-off bad loans.

The government plans to infuse 113 billion rupees into state-run banks in the next fiscal year so that they could meet minimal capital ratios mandated by Basel III norms after being hit by bad loans.

"Even while the government infuses capital, the minority stake holders could be given the rights issue so that nobody's shares are diluted," Chidambaram said, adding the capital adequacy ratio of banks would be maintained one percent higher than the Basel norms.

(Additional reporting by Swati Pandey in Mumbai; Editing by Ron Popeski)