By Devidutta Tripathy and Sujoy Dhar
MUMBAI/KOLKATA (Reuters) - State Bank of India, the nation's top lender by assets, posted better-than-expected quarterly bad debt levels on Friday and said it now expected an improvement, a long-awaited sign of easing pressure that helped its shares jump over five percent.
The loan improvement in the three months ended in March helped SBI, which accounts for about a quarter of Indian loans and deposits, post a 23 percent rise in net profit to 37.42 billion rupees ($589 million), above forecasts.
The bank's gross bad loan ratio fell to 4.25 percent the March quarter from 4.9 percent in the previous three months.
"The stress is coming down," said the bank's chairman Arundhati Bhattacharya, who has upgraded software and boosted specialised teams to cope with bad loans.
"Going forward we do believe that we'll be able hold (the bad loan ratio) at this level or over a period of time try and bring it further down," Bhattacharya told a news conference at the eastern Indian city of Kolkata.
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Two straight years of weaker economic expansion and stretched corporate balance sheets have led to a surge in Indian banks' bad loans. Government-controlled lenders led by the SBI, which dominate India's banking sector with more than 70 percent share of loans, have amassed bad loans at a faster pace than their private sector rivals.
Weaker economic activity has also taken a toll on loan growth for banks, and a recovery could be months away.
SBI expects loan growth to accelerate to around 14 percent for the fiscal year to March 2016, Bhattacharya said. That compares with an adjusted loan growth of about 10.5 percent the year before.
The bank, which has plans to raise as much as 150 billion rupees ($2.4 billion) in capital by selling shares, has all approvals in place for the sale but has yet to decide on the instrument and exact timing, Bhattacharya said.
SBI shares, valued at nearly $35 billion, closed 2.7 percent lower, as investors booked profit on a gains after the results. The main Mumbai index <.NSEI> closed 0.5 percent higher.
($1 = 63.4553 rupees)
(Editing by Clara Ferreira Marques and Mark Potter)