Public sector banks have seen a smaller build-up in bad debt during the last nine months, with the increase confined mainly to the housing and real estate segments.

In segments such as automobile and infrastructure, the situation has improved marginally, while the farm debt waiver scheme has helped the public sector banks cut the level of gross non-performing assets by a third.

What's worrying for the public sector banks is the rise in delinquency in the housing portfolio, which does not include real estate. But a bank chief said that with low exposure to the real estate sector, the state-run banks have fewer worries.

The other area of concern is credit cards but the operations of public sector banks in this segment are small compared with the likes of ICICI Bank [Get Quote], HDFC Bank [Get Quote] and Citibank, the largest players in the business.

In case of micro, small and medium enterprises, the banks are expecting the special restructuring dispensation to come to their aid. "There are cash flow problems for some of the MSMEs, but things are not as bad as is being made out to be," said a banker.

Compared with the end of March 2008, the latest quarterly numbers show that the 43 listed banks have seen their gross NPAs rise by 12.32 per cent or by Rs 6,767 crore (Rs 67.67 billion) to Rs 57,281 crore (Rs 572.81 billion) at the end of December 2008.

Public sector banks, of which some such as Punjab & Sind Bank are unlisted, have together seen a 5.78 per cent rise in gross NPAs, according to data collated by the Indian Banks' Association.

While the rise in bad debt was not as much as was widely expected, a banking analyst at Merrill Lynch said this could be the beginning of a period of increase. A steep rise, especially in the MSME segment, is likely between April and June, analysts said.

With a slowdown in the economy and companies experiencing cash flow problems, CLSA Asia Pacific Research estimates NPAs as a proportion of advances to rise to 4.8 per cent by 2010-11, as against 2.4 at the end of March 2008.

At the end of December 2008, NPA of the listed banks was estimated at 2.6 per cent of advances. In case of the public sector banks, gross NPAs were estimated at 2.03 per cent, as against 2.25 per cent at the end of March 2008.

"While NPAs will rise, it may not be as a steep rise as is being predicted," said a bank chief.

Union Bank of India [Get Quote] chairman and managing director MV Nair said that banks have already stepped up monitoring and the debt restructuring facility will help keep a build-up of bad debt under check.

"It is surely an area of concern but the key issue is how banks are able to respond to challenges thrown up by a lender or a sector.

The monitoring capabilities built within the organisation will hold the key," he said.