The banking system’s non-performing assets (NPA) position at end March this year is likely to be better than in December-end 2013, Reserve Bank of India Deputy Governor R Gandhi said.

“It (March-end position) should most likely be better than the earlier quarter,” Gandhi told newspersons on the sidelines of an Assocham-organised national conference on rising NPAs in banks.

All the banks are yet to provide data to the RBI on the NPA or bad loan position as at end-March 2014, he added.

As at end-December 2013, gross NPAs of the domestic banking system stood at 4.4 per cent of gross advances.

In his address at the conference, Gandhi suggested that credit ratings be used more proactively to stem the problem of increasing NPAs and stressed assets.

Use of external ratings

Gandhi asked banks to use external ratings as third party professional assessment either on a standalone basis or in combination with their own internal ratings.

However, banks need to balance the use of external ratings, as the recent financial crisis has highlighted the dangers of overdependence on ratings, he said.

While some may view the December-end 2013 NPA ratio (4.4 per cent) as reasonable given the economic conditions prevalent in the country and elsewhere, the total stressed assets in the banking system (which include NPAs and restructured standard assets) sto0d at 10.13 per cent of gross advances of banks, Gandhi said.

“This is a cause of concern for the Reserve Bank,” he said.

Why are NPAs rising?

Gandhi said NPA increases have been more pronounced in the case of public sector banks.

There are various factors affecting the asset quality of scheduled commercial banks, such as the current slowdown, global and domestic, persistent policy logjams, delayed clearances of various projects, aggressive expansion by corporates during the high-growth phase, and so on.

However, besides the economic slowdown, it is the shortcomings in credit appraisal, disbursal and recovery mechanism of banks that are in large part responsible for the high level of NPAs, he said.

Lack of robust verification and screening of application, absence of supervision following credit disbursal and shortfalls in the recovery mechanism have led to the deterioration of asset quality of these banks, he said.

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