India’s bad loans problem is getting worse but banks are reluctant to even acknowledge it in their quarterly results. Take Axis Bank, one of the country’s major private lenders. According to its latest results released on October 17, the bank’s earnings rose 35.5% year-on-year, yet its gross non-performing assets grew to Rs 27,402 crore in the July-September quarter from Rs 22,031 crore in April-June 2017. Two years ago, its NPAs were only about Rs 4,451 crore.

The bank’s NPA ratio rose to 5.9% in July-September from 5.03% in the preceding quarter. That is, 5.9% of the total money lent by the bank is now bad debt.

A non-performing asset for a financial institution includes loans that may not be repaid, or whose principal or interest amount is not paid on time.

Axis Bank further reported that there was a difference of over Rs 5,600 crore in its calculation of its bad loans and the Reserve Bank of India’s. This is worrying as it means banks are not disclosing their full exposure to stressed assets in their quarterly results.

“In many cases, banks continue the practice of ‘extend and pretend’ – they advance loans to defaulters, sometimes for working capital, sometimes to the company’s subsidiary and sometimes to the company to service the old debt or interest payments thereon,” said Radhika Pandey, a consultant at the National Institute of Public Finance and Policy.

It is only when the Reserve Bank audits such banks that this practice comes to light, Pandey added. In Axis Bank’s case, the audit found it had under-reported its gross non-performing assets by Rs 5,632 crore in the financial year ended March 31, 2017. Accounting for this, Axis Bank’s profit for 2016-17 falls by as much as 31%. Indeed, the bank said in a statement this week, it has “duly recorded the impact of such reclassifications in the results” for the quarter ended September 30.

Although Axis Bank did not name its defaulters, it mentioned that nine of its NPA accounts were held by a consortium of banks that owe it Rs 4,867 crore. “According to the Axis management, only 6% of this account is classified as stressed,” Anil Gupta, vice president of the credit rating agency ICRA, pointed out. “As and when asset quality check happens in other banks by the RBI, this account will come up and push the divergence numbers upwards.”

This is not the first time the Reserve Bank has found banks under-reporting NPAs. In March this year, the central bank estimated that IDBI Bank, a public lender, had underestimated its gross NPAs for 2016-17 by Rs 6,816 crore. For the same year, the privately-owned YES Bank under-reported its NPAs by Rs 4,176 crore – the bank had stated its gross NPAs stood at Rs 748.98 crore as on March 2016 but it turned out the actual sum was more than five times higher at Rs 4,925.68 crore. Axis Bank similarly underestimated its NPAs by 155.7% while ICICI Bank under-reported by 19.5%.

Together, in the financial year ended March 2017, Indian banks under-reported their non-performing assets by Rs 44,463 crore, according to Gupta.

“We were hopeful that after a year of huge divergences being reported by all major banks, we won’t see divergence this time around but it is a surprise that banks and the RBI still differ on how they classify assets [loans],” he said.

Worse to come

In its results, Axis Bank said it is maintaining a “watch list” of loans worth Rs 6,052 crore that are at the risk of turning bad. At the start of this year, the bank had identified loans worth Rs 22,628 crore that were at risk. Of those, loans worth Rs 19,340 crore have turned bad so far, according to BloombergQuint, suggesting that the recovery rate is low.

ICRA has estimated bad loans to touch a high of Rs 8.8 lakh crore to Rs 9 lakh crore by March 2018 and the gross NPA ratio across banks to cross 10%. “As the RBI also said in its Financial Stability Report, the worst is yet to come,” Gupta said. “Bad loans have just started getting revealed and in a slowing economy, the situation can get much worse than it is right now.”

In the Financial Stability Report published in June, the Reserve Bank estimated that the average gross NPA ratio of all scheduled commercial banks could rise from 9.6% in March 2017 to 10.2% by March 2018.