Faced with an increase in defaults on home loans, banks are beginning to feel the 'bite' after growing their portfolios at breakneck pace in the last three years, according to State Bank of India Chairman O P Bhatt.

Speaking at a seminar on the challenges faced by Indian banks, Bhatt predicted that loans to small and medium enterprises would be the next category to hit high default levels since it bears the burden of the highest rates of interest.

"The capacity of Indian banks to identify and price risk is not adequate and in many cases absent," Bhatt said at the seminar, which was organised by Merchants' Chamber and Indian Banks' Association.

He added that the incidence of non-performing loans is beginning to rise in India.

"The balance sheet may show net NPAs (non-performing assets or sticky loans) coming down, but that is more due to write-offs and provisioning. The highest rise (in NPAs) is in real estate, particularly housing loans. This is beginning to bite," Bhatt said.

He predicted that NPAs would rise during the year on the back of rising consumer prices and infrastructure constraints.

For SBI, the gross NPAs in the home loan portfolio rose 50 basis points to nearly 4 per cent in 2006-07. SBI's home loan portfolio grew 20.2 per cent in April-December 2006 to reach Rs 36,475 crore. Housing loans account for over 52 per cent of its retail advances.

Citigroup Chief Executive (India) Sanjay Nayar and Standard Chartered India CEO Neeraj Swaroop agreed with Bhatt's prognosis about home and SME loans, though Swaroop clarified that his bank had not suffered a rise in home loan defaults.

Referring to the spread of NPAs, Swaroop added that the trend of rising bad loans would spill over to sectors related to realty (housing construction and commercial realty).

In this backdrop, he questioned the sustainability of the current high rates of economic growth.

"The economy is cyclical and all bad loans are made in good times," he said, referring to the over 8 per cent annual growth of the Indian economy in the past three years.

On business growth estimates for 2007-08, Swaroop said the economy is showing signs of moderation and in keeping with it the growth in advances is expected to be 25 per cent, against 28 per cent last year. Deposit growth was expected in the range of 20-22 per cent in 2007-08, he said.