RBI asks banks to strenghten bad loan monitoring

People walk in front of the Reserve Bank of India (RBI) building in Kolkata May 21, 2012.

MUMBAI (Reuters) - Indian banks need to strengthen monitoring of bad loans and also raise capital for the implementation of Basel III guidelines, the RBI said in a report released on Thursday.

Indian banks' net bad loans as a percentage of their advances rose to 1.4 percent in the year ended March 2012, from 1.1 percent in the year-earlier period, with state-run banks posting higher defaults as compared to their private peers, the report said.

"The slippage ratio of the banking system, which showed a declining trend during 2005-08, increased during 2008-12," the Reserve Bank of India said in its annual report on 'Trend and Progress of Banking in India in 2011-12'.

The RBI, in its quarterly review of the monetary policy last month, expressed concern over the significant rise in bad loans and cited lack of transparency in information sharing as a major reason for the defaults.

Further, in the trend and progress report, the central bank said banks will need to raise more capital for meeting higher capital standards, stricter liquidity and leverage ratios and adopt a more cautious approach to risk under Basel III rules.

The RBI estimates that banks will need 1.4-1.5 trillion rupees of common equity to comply with Basel III norms. (Reporting by Neha Dasgupta and Suvashree Dey Choudhury; Editing by Sunil Nair)