The rise in net non-performing assets of the state-run bank, which is the lead lender to a number of troubled companies including Air India and Kingfisher Airlines, dampened investor hopes that its asset quality had stabilized. 

"They have disappointed in terms of asset quality, but that can be put down to Kingfisher," said Manish Agarwalla, banking analyst at MF Global Sify Securities in Mumbai. 

Shares in the bank, which the market values at about $28 billion, closed down nearly 2 percent in a firmer overall market on Monday after it said its non-performing assets rose to 2.22 percent of the total from 1.61 percent a year earlier. 

SBI reported a record net profit of Rs.32.6 billion ($663 million) for the three months to Dec. 31, up from Rs.28.3 billion a year earlier. Net interest income rose 26.7 percent from a year earlier to Rs.114.7 billion. 

Analysts, on average, had expected a 10 percent rise in net profit to Rs.31.2 billion, according to Thomson Reuters I/B/E/S. The numbers are for SBI's core banking operations and exclude businesses such as insurance and investment banking. 

"The only negative aspect is the non-performing assets," said Krishnan ASV, banking analyst at Ambit Capital in Mumbai. 

SBI's large private rivals, including ICICI Bank, HDFC Bank and Axis Bank, have also reported better-than-expected quarterly earnings, allaying some concerns about the asset quality of India's banks. 

SBI set aside Rs.30.1 billion for bad loans in the quarter, nearly 85 percent more than in the December quarter of 2010. In the preceding quarter, it increased provisions for non-performing loans by 35 percent from a year earlier.

The bank's performance is expected to improve in coming quarters as impaired loans are not likely to rise significantly, Chairman Pratip Chaudhuri told reporters.  

"The aberration that we had seen in the past quarters is over," he said. "The bank is now on a consistent path of profitability." 

SBI reported an unexpected plunge in net profit in the March quarter, followed by two more disappointing quarters as bad loans and provisions increased. 

Concern about rising bad loans in Asia's third-largest economy prompted Moody's to cut its outlook for the Indian banking sector to negative from stable in November.

SBI's gross lending rose 17.5 percent from a year earlier to Rs.8.7 trillion at the end of December. 

That was faster than the annual loan growth of 16.9 percent in the three months to September. 

The central bank has said it expects credit to grow by 16 percent this fiscal year ending March 31, down from 20 percent a year earlier. 

SBI said its net interest margin, a key gauge of profitability, rose to 3.82 percent in the December quarter from 3.4 percent in the same period a year earlier. 

The bank expects an improvement of 5-10 basis points in the margin in the current quarter compared with the December quarter, Chaudhuri said. 

Net interest margins are forecast to improve to 3.8 percent for the fiscal year from an earlier projection of 3.65 to 3.75 percent, he said. 

"Our source of strength comes from net interest margins," Chaudhuri said. "So to that extent we will be able to absorb any additions in bad loans."  

Chaudhuri has previously said that SBI, which already holds about a quarter of India's loans and deposits, plans to increase its market share for loans by 1 percentage point a year.