MUMBAI (Reuters) - Axis Bank Ltd on Friday reported a surge in bad loans in its first quarter that pushed net profit down by a fifth but the bank said the growth in problem loans was in line with its expectations.

An employee speaks on his mobile phone as he walks inside Axis Bank's corporate headquarters in Mumbai July 17, 2012. REUTERS/Vivek Prakash/Files

Most Indian lenders have reported an increase in troubled loans this year following an asset quality review ordered by the central bank as part of a broader clean-up of the country’s banking sector.

Axis Bank, the country’s third-biggest private sector lender by assets, said net profit fell 21 percent from a year earlier to 15.56 billion rupees ($232 million) for the three months to June 30, missing analysts’ estimate of 19.98 billion rupees.

Its bad loans rose by 36.38 billion rupees during the quarter, taking its gross bad loans to 95.53 billion rupees, or 2.54 percent of its total loans as of end-June, compared with 1.67 percent at the end of March.

“We are not unduly perturbed,” the bank’s finance chief Jairam Sridharan told reporters on a conference call. He said the rise in bad loans was in line with the bank’s previous guidance of potential trouble.

The bank said it expected to keep credit costs in a previously guided range of 125 to 150 basis points. Credit costs reflect how much a bank has to set aside in provisions for potential loan losses.

In April, Axis Bank had said it had prepared “watch list” of about 226 billion rupees worth of loans, or 4 percent of its assets, that could potentially become troubled.

It had guided for 60 percent of those loans to turn sour over the next eight quarters. Sridharan said on Friday they maintained that view.

That watch list reduced to about 203 billion rupees as of end June, Axis Bank said, adding 92 percent of the corporate loans that turned sour in the June quarter were from that list.

“It is playing out to the script,” Sridharan said.

($1 = 67.0997 Indian rupees)