MUMBAI –  State-run Bank of India (532149.BY) Friday reported a muted 10% increase in its fiscal third-quarter net profit, as it set aside a larger amount to cover the likely pressure from rising bad loans.

Net profit for the October-December period grew to INR7.16 billion from INR6.53 billion a year earlier. Net interest income--the difference between interest earned and interest paid--clocked a 4% rise to INR20.67 billion.

Indian lenders have been facing a pressure on their loan books as high interest rates and a slowing domestic economy have increased instances of defaults among borrowers, leading to a rise in bad loans.

Bank of India's gross bad loans as a percentage of total loans grew to 2.74% from 2.36% a year earlier. This led the lender to increase its provisioning by 39% to INR6.93 billion. However, the bank's gross bad loans and provisioning are on a declining trend on a quarter-on-quarter basis.

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