<div>State Bank of India, India's largest lender, beat expectations with a 25 percent rise in second quarter profit on Friday, boosted by increased income from its advances and a drop in its closely monitored bad loan ratio.</div><div> </div><div>Analysts in the sector have been watching for signs that credit quality is stabilising in India. State-owned banks that dominate the industry have been grappling with their worst bad debt burden in a decade, after years of liberal lending and slow credit growth.</div><div> </div><div>Friday's earnings provided room for optimism. SBI, a bellwether which has been tightening scrutiny of borrowers and increasing fund recovery efforts, said gross bad loans as a proportion of total loans dipped to 4.15 percent in July-September from 4.29 in the previous three months.</div><div> </div><div>Punjab National Bank, India's fourth largest, echoed the dip with a ratio of 6.36 percent versus 6.47 percent.</div><div> </div><div>The news sent SBI shares up over 4 percent on the day and PNB more than 3 percent, against a near flat market.</div><div> </div><div>"SBI and PNB's asset quality has been stabilising for the past few quarters," said Vaibhav Agarwal, analyst at Angel Broking. "Large state-run banks that have slowed down lending are seeing improvement in asset quality: you have to be conservative in a bad environment."</div><div> </div><div>Yet in an illustration of the sector's uneven and fragile improvement, Bank of Baroda Ltd, India's second-biggest, posted a spike in bad loans and provisions that pushed quarterly net profit down almost 90 percent - a fraction of expectations.</div><div> </div><div>Bank of Baroda was one of the first state-owned lenders to appoint a boss from the private sector: P. S. Jayakumar, former head of a real estate firm, joined in October, and analysts said the just-ended quarter would mark a transition.</div><div> </div><div>On Friday, Jayakumar said the bank had at least two "tough" quarters ahead.</div><div> </div><div>"Managing NPAs and enhancing credit quality is one big, immediate goal," he told reporters.</div><div> </div><div>Bank of Baroda's high exposure to large infrastructure groups and steel and mining companies, all badly hit by cheap Chinese imports and low prices, has been weighing on asset quality in recent quarters.</div><div> </div><div>Its gross bad loan ratio was 5.56 percent from 4.13 percent in the previous three months and 3.32 percent in the same quarter a year earlier.</div><div> </div><div>The bank said provisions for problem loans more than doubled to 18.9 billion rupees, which included 25 percent of a credit account worth 3.74 billion rupees that was declared fraudulent.</div>
