The Reserve Bank on Friday said banks would need to support growth while being watchful of the credit behaviour of entities whose loans were restructured during the pandemic period to arrest slippages.
Banks had extended moratorium on repayment of loans and restructured advances to businesses to help them combat the impact of the COVID-19 pandemic and subsequent lockdowns.
In its annual report released on Friday, the RBI said the banking sector has witnessed improved financial parameters despite the pandemic.
"There is, however, a need to be watchful of the credit behaviour of the restructured advances and possibility of increased slippages arising from sectors that were relatively more exposed to the pandemic," it noted.
With the unwinding of support measures, some of the restructured accounts might face solvency concerns, and the impact on banks' balance sheets will become clearer in the upcoming quarters, the report said.
Prudence warrants proactive recognition of any non-viable accounts to activate timely resolution, it added.
The report said the gross non-performing assets (GNPA) ratio of all scheduled commercial banks (SCBs) moderated to its lowest level in six years, aided by efforts towards recoveries and technical write-offs.
"Going forward, as the economy recovers and credit demand rises, banks will need to focus on supporting credit growth while being vigilant of the evolving risks.
"Care needs to be taken to ensure that fresh slippages are arrested, and banks' balance sheets are strengthened to avoid future build-up of stress," said the Reserve Bank's Annual Report for the Year 2021-22.
It also said bank credit growth has begun to pick up to track nominal GDP growth and lenders are regaining bottom lines.
Bank credit to commercial sector improved and aggregate deposits moderated with the ebbing of precautionary savings, it said, adding bank credit growth picked up, especially since August 2021, and it was broad-based.
During 2021-22, against the target for agricultural credit of Rs 16.5 lakh crore, banks achieved 104 per cent of the target (Rs 17.09 lakh crore) as on March 31, 2022.
The banking sector was cushioned against the disruptions caused by the pandemic by adequate liquidity support and various regulatory dispensations provided by the Reserve Bank, it said.
Banks bolstered their capital to augment risk absorbing capacity, aided by recapitalisation by the government in case of public sector banks (PSBs) along with capital raising from the market and retention of profits by both PSBs and private sector banks.
It further said NBFCs and urban cooperative banks (UCBs) will have to be mindful of frailties, wherever they exist, in their balance sheets and ensure robust asset-liability management, apart from improving the quality of their credit portfolios.
The central bank also said in order to further strengthen the regulatory and supervisory framework, several measures are expected to be put in place for banks and NBFCs during the current financial year.
On financial inclusion, the report said the number of banking outlets in villages -- including branches, banking correspondents and other modes -- increased from just 67,694 in March 2010 to 12.53 lakh by December 2020 and further to 19 lakh by December 2021.
On the overall economic situation, the Reserve Bank said fiscal 2020-21 brought many challenges, but a recovery is underway in spite of headwinds.
The future path of growth will be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation within the target while supporting growth and targeted fiscal policy support to aggregate demand, it added.