The Reserve Bank today said the banks need to strengthen their due diligence and credit appraisal system along with overall monitoring mechanism to contain the rising bad assets seen in the banking system. 

"Banks need to, not only utilise effectively, the various measures put in place by the Reserve Bank and the government for the resolution and recovery of bad loans, but also have to strengthen their due diligence, credit appraisal and post-sanction loan monitoring systems to minimise and mitigate the problem of increasing NPAs," the RBI said in its report on 'Trend and Progress of Banking in 2011-12' released here. 

The bank noted that both the NPA stock and slippage ratio has increased in the last financial year. 

"During 2011-12, the NPA stock has risen. The slippage ratio of the banking system, which showed a declining trend during 2005-08, increased during 2008-12," it said. 

As per the data released by the central bankBSE 1.67 %, gross NPA ratio increased to 3.1 per cent in FY12 from 2.5 per cent reported in FY11. 

Similarly, net NPA rose to 1.4 per cent in FY12 from 1.1 per cent compared to previous fiscal. 

In absolute terms, gross NPA stood at Rs 1,423 billion at March 2012, while the net NPA stood at Rs 649 billion. 

Terming the slowdown in the economy and inadequate appraisal and monitoring of credit proposals as the major reasons behind the spurt in bad assets, the apexBSE 0.00 % bank said the deterioration in asset quality is more pronounced in the case of public sector banks. 

"During 2011-12, the gross NPAs of public sector banks increased at a higher rate as compared with the growth rate of NPAs at a system-level," the report said. 

In addition to rise in gross NPA, fresh accretion of NPAs measured by the slippage ratio increased to 2.5 per cent in 2011-12 from 2 per cent reported in 2010-11. 

The banking system also witnessed a rise in restructured asset in sync with the increasing NPA level in the system. 

"The steep increase in gross NPAs during 2011-12 was accompanied by a considerable pick-up in the growth of restructured advances. This was mainly due to the steep increase in restructured advances by public sector banks, particularly nationalised banks," the report said. 

As per data released by the RBI, total restructured assets as a per cent of gross advances stood at just above 5 per cent in FY12 from under 4 per cent a year earlier. 

In the sector wise analysis of bad asset, the report said deterioration in asset quality of public sector banks was spread across priority and non-priority sectors. 

It also noted that while half of the bad asset came from priority sector, share of agriculture sector in total NPA registered an increase. (PTI)