Reserve Bank Deputy Governor R Gandhi on Saturay expressed concern over bad loans and said banks should strengthen their internal credit appraisal systems to minimise the risk of default.
"The final (NPA) figure for March 2014 is yet to be known; while some may view this ratio as reasonable, given the economic conditions prevalent in the country and elsewhere, the total stressed assets in the banking system (including restructured standard assets) as at December 2013 was 10.13 per cent of the gross advances of the banks, which is a cause of concern for the Reserve Bank," he said.
However, he said early indications are that the figures for the fourth quarter are better than the third quarter.
The gross non-performing assets (NPAs) or bad loans of the domestic banking system was 4.4 per cent of gross advances, he said at an event organised by Assocham.
To minimise the risk of default, he said, "There is a growing need for banks to strengthen their internal credit appraisal system that is on their credit assessment and risk management mechanisms."
At the same time, he said, banks should consider using external credit appraisals in conjunction with their own assessment.
"This would mean getting the house in order and at least on this score, banks would be on stronger ground. Banks would still be vulnerable to other factors, such as economic slowdown or policy changes or wilful defaults. But, one area of concern would be plugged," he said.
"We can see that among the proactive steps that a bank can take to stem the problem of increasing level of NPAs and stressed assets, use of credit ratings is an important one," he added.
However, he said, banks need to balance the use of external ratings, as the recent financial crisis has highlighted the dangers of overdependence on ratings.
Noting that growing NPAs are the biggest challenge for the banking industry, he said a slowing economy is bound to see an increase in bad loans.
"Notwithstanding the economic weakness, NPAs of banks have registered increase since 2011-12, which is a cause of concern for us," he said, adding that the rise is more pronounced in the case of public sector banks.
The gross NPAs of public sector banks rose to Rs 2.03 lakh crore at the end of September from Rs 1.55 lakh crore on 31 March, 2013.