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New Delhi: Three state-run lenders — Central Bank of India, Dena Bank and Allahabad Bank — reported massive losses on Tuesday, while Punjab National Bank narrowly missed slipping into the red as the growing pile of stressed loans took a toll on their health, raising concerns over the precarious state of the financial sector."The surgery is not over... Something which has to be cleaned up has to be cleaned up. Everybody has to undergo the pain," PNB managing director & CEO Usha Ananthasubramanian said.The trends available from the December-end quarter results, announced on Tuesday, and ICICI Bank’s performance pointed towards tough times for other lenders as well following the Reserve Bank of India’s bad loan clean-up drive.Analysts expect bank profitability to remain under stress for at least one more quarter as RBI has given lenders two quarters to provide adequately for loans that are under pressure. Many steel and infrastructure companies are on the list where banks have had to keep aside more more funds, known as provisioning, to stay within the regulator’s red line.The health of the banking sector has been in doubt as bad loans soared following the impact of economic slowdown, which dented the books of companies after borrowed excessively during the boom years to fund projects, some of which never took off.As a result the volume of stressed assets was estimated at around Rs 8 lakh crore.Unlike the past when banks could hide defaults, new rules mandate that banks set aside funds for potential losses to avoid ballooning of risk when loans actually turn into a non-performing asset (NPA). A loan is classified as an NPA if an instalment remain unpaid for 90 days. This time, RBI’s diktat following an asset quality review, has gone beyond what banks classify as NPAs to include loans that were sticky.As a result, at the end of December 2015, the strict norms pushed up PNB, Central Bank and Dena Bank stock of gross NPAs by at least 49% over the year ago level.For Dena Bank, nearly a tenth of its advances have turned NPAs, while the ratio of gross NPA to advances for PNB was only marginally lower at 8.5% of their total loans — levels which have not been seen in nearly 15 years when a massive systemic overhaul was undertaken, including legal changes. Powered by a surging economy gross NPAs of commercial banks had declined from over 12% in 2000-01to a little under 2.5% in 2008-09.But loans started coming under stress after the 2008 financial crisis but RBI and the government sought to protect banks through a set of special measures.The sustained slowdown, however, pushed RBI to finally crack the whip late last year as the ratio of NPAs and restructured loans where instalments were being paid on time added up to nearly 11% of advances for the public sector banks at the end of December 2014 and has been steadily rising.While banks were expected to put up a poor show, the performance was much worse than anticipated and saw stocks tumble. Dena Bank closed over 12% lower on BSE, while PNB fell almost 7% and Allahabad Bank over 3%.To the extent that the losses being declared by banks are a reflection of their finally coming clean on non-performing assets, we should be glad. At the same time, it is quite clear that business as usual cannot be an option for the banking sector. State-owned banks, for instance, must not be allowed to pile up NPAs and then bailed out through recapitalisation using taxpayer money. All banks must adopt a no-lending stance towards wilful defaulters, something they have not done in the past.