"There is no point in hiding behind the recession. The health of a financial system depends on the quantum of non-performing assets. We can brush it under the carpet for short-term gains, but in the long run, the system will suffer," Narasimham told The Financial Express.

According to him, the NPA situation in the banking system is "serious" but not "alarming". "There is no cause for panic or alarm. But all is not well on the NPA front," Narasimham said.

"We have taken a holistic approach in the report. We are in not in favour of tightening norms overnight. Everything needs to be sequenced. For instance, capital adequacy ratio should be raised to 10 per cent in two stagesover a period of time," he said.

The second Narasimham panel has recommended a tightening of the asset classification and provisioning norms with an objective of moving towards the international norms. The panel is in favour of introducing 90-day income recognition norms replacing the present 180-day norms in a phased manner. It has also said that government guaranteed advances, which have turned sticky, should be treated as NPAs.

The panel also said that the average level of the net NPAs of all banks should be brought to below five per cent level by 2000 and three per cent level by 2002. Bankers and captains of industries have, however, made a strong pitch for not tightening the NPA norms against the backdrop of industrial slowdown and economic downturn. They have also been lobbying for a blanket RBI permission for reschedulement of loans without classifying the rescheduled accounts as substandard. The central bank has, however, categorically said NPA norms will not be diluted.

Almost all commercialbanks are set to post higher NPAs during the current fiscal despite an all-out recovery drive. "The NPA level will go up marginally this year even though we are keeping a strict vigil on the quality of assets," said Dena Bank chairman Ramesh Mishra.

Global rating agency Standard & Poor's has estimated the NPA levels of the Indian banking system at a whopping 70 per cent even though according to RBI the net NPA of Indian banks in March 1997 stood at about nine per cent. The rating agency has pointed out that Indian asset classification norms remain lenient and if more stringent international norms were applied, banks' asset quality would only worsen. S&P has also blamed Indian banks for resorting to the system of evergreening (reschedulement of loans).

The New York headquartered Thomson BankWatch, the largest bank rating agency in the world, has also expressed concern over the alarming rise in the level of NPAS of Indian banks. According to the rating agency, the NPAs level of the banking industry is farhigher than that shown by the Reserve Bank of India.

According to officials at Thomson Bank Watch, which specialises in credit ratings of banks and financial institutions, though the RBI has pegged the NPA levels of banks at Rs 43,000 crore, the actual level could be much higher.