You are using an older browser version. Please use a supported version for the best MSN experience.

Bad loans are a cause of concern: RBI deputy governor R Gandhi

LiveMint logoLiveMint 31-05-2014 PTI

New Delhi: Reserve Bank of India’s (RBI) deputy governor R. Gandhi on Saturday 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% of the gross advances of the banks, which is a cause of concern for the Reserve Bank,” Gandhi 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% of gross advances, Gandhi said at an event organised by Assocham in New Delhi.

To minimise the risk of default, Gandhi 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.”

However, Gandhi 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,” Gandhi said, adding that the rise is more pronounced in the case of public sector banks.

The gross NPAs of public sector banks rose to Rs2.03 lakh crore at the end of September from Rs1.55 lakh crore on 31 March 2013.

More From LiveMint

image beaconimage beaconimage beacon