India's banks should be watchful of the credit behaviour of restructured loans and the possibility of increased repayment slippages from sectors more exposed to the pandemic, the Reserve Bank of India said.

With the unwinding of support measures, some restructured accounts might face solvency concerns and the impact on banks' balance sheets will become clearer in the upcoming quarters.

Prudence warrants proactive recognition of any non-viable accounts to activate timely resolution, RBI said in its annual report released on Friday.

"As the economy recovers and credit demand rises, banks will need to focus on supporting credit growth while being vigilant of the evolving risks," it said.

The central bank cautioned that banks need to take care to ensure that fresh slippages are arrested and their balance sheets are strengthened to avoid future build-up of stress.

The gross non-performing asset (NPA) ratio of banks, however, has moderated to its lowest level in six years, aided by efforts towards recovery and technical write-offs, RBI said.

Bank credit growth has begun to pick up to track nominal GDP growth and lenders are regaining bottom lines.

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, the annual report 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.

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 macro-economic situation, RBI 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.