India's economic and credit slowdown is revealing the strengths and weaknesses of its banking sector. Roiled by unprecedented frauds and surging bad debt, the nation's state-run banks have returned the least to investors this year. However, investors' belief in the potential of Asia's No. 3 economy shows in the fact that its newest lenders offer the best returns, and a clutch of private Indian banks are among the world's most expensive. Indian private-sector banks are also among the most richly valued. HDFC Bank Ltd. became only the third Indian company whose market cap has crossed the 5 trillion rupee ($73 billion) mark, Kotak Mahindra Bank Ltd. retained its strong credit growth without worsening asset quality. Woes in the state-run bank sector are worse than thought. Bad loans across government-controlled banks are more than double total market cap. SBI reported a record $1 billion loss this week for the quarter ended March 31 as provisions surged and rival PNB reported India's largest ever bank loss after a $2 billion fraud came to light. Half of India's 22 state-run banks with 20% of the sector's total loans are under the regulator's strict Prompt Corrective Action program.