The banking system's non-performing assets (NPA) position for the fourth quarter of 2013-14 is likely to come out better than the third quarter, Reserve Bank of India Deputy Governor R Gandhi said.
Use of credit ratings could be an important proactive step that a bank can take to stem the problem of increasing level of NPAs and stressed assets, he said at an Assocham organised national conference on 'Growing NPAs in banks'.
However, banks need to balance the use of external ratings, as the recent financial crisis has highlighted the dangers of over dependence on ratings.
As at end December 2013, the gross NPAs of the domestic banking system was 4.4 percent of gross advances. The final figure for March 2014 is yet to be known.
While some may view this ratio (4.4 percent) 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) as at end December 2013 was 10.13 percent of gross advances of banks, Gandhi said.
"This is a cause of concern for the Reserve Bank", he said.
Why are NPAs increasing?
Gandhi highlighted that the 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 adversely 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 etc.
However, it is the shortcomings in the credit appraisal, disbursal and recovery mechanism of the banks, besides the economic slowdown that can in large part be held responsible for their 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.