Like state-run peers Punjab National Bank, Canara Bank and Bank of India, SBI's profits have been clipped by an increase in defaults by companies battling reduced cash flows, high inflation and delays in government approvals for projects.
To avoid a further worsening in its asset quality, SBI will conduct weekly reviews, and install new technology, to quickly identify loan accounts showing signs of stress, Chairwoman Arundhati Bhattacharya told reporters.
"We will do a better management of what we have and have much better processes in place to pick and choose. We will have much better early warning signals," she said.
SBI posted a 34 percent drop in third quarter net profits to 22.34 billion rupees ($358.21 million) in the quarter ended December, lagging analysts' estimate of 25.3 billion rupees.
Net interest margins, a key gauge of profitability, were largely unchanged at 3.51 percent from 3.49 percent in the preceding quarter.
Gross non-performing loans as a percentage of total assets rose to 5.7 percent from 5.6 percent in the previous quarter.
"Revenue and loan growth numbers have come in-line but nobody is talking about growth anymore. The entire focus is on asset quality," said Manish Ostwal, banking analyst at KR Choksey Shares & Securities.
SBI, which accounts for a quarter of India's loans and deposits, saw a tepid response from foreign investors for a $1.28 billion share issue last month largely because of concerns about its asset quality and earnings growth in a slowing economy.
NO RECOVERY IN SIGHT
SBI chairwoman Bhattacharya, who took office last October, is under pressure to tame non-performing loans and reverse weakening profit growth while helping to reassure investors who have dragged down the bank's shares by almost half from their peak in November 2010.
Bhattacharya said the bank had restructured outstanding loans worth 561 billion rupees as of the end of December, about 61 percent higher from a year ago.
Bad debts, however are likely to rise. Last month, India's top private sector lender ICICI Bank warned that corporate defaults would rise in the next few quarters. ICICI posted its slowest profit growth in four years in the December quarter.
SBI Chief Financial Officer R.K. Saraf also said he expected the banking sector's loan problems to linger as India's economy grows at its slowest pace in a decade.
"Mid corporates neither have the resources nor the management bandwidth nor the wherewithal to face a prolonged slowdown like this," Saraf told reporters. "We feel, going forward, this stress will continue for some time."
Ratings agency Fitch expects stressed assets at Indian banks, as well as bad and restructured debt, to total 14 percent of loans by March 2015, up from 9 percent in March 2013.
SBI shares, valued at about $17 billion, closed down 1.7 percent at 1,475.10 rupees in a Mumbai market that closed 0.9 percent higher.