Worsening asset quality, with a sluggish demand environment, is a major reason behind the tepid credit growth seen across the banking sector, Reserve Bank of India (RBI) said on Thursday.

?In wake of the growth deceleration, deterioration in banks? asset quality increased risk aversion, which supplemented demand-side factors and augmented deceleration in credit growth across bank groups,? the central bank said in its annual report. The ratio of gross non-performing assets (NPAs) to gross assets for all banks, stood at 3.42% as on March 2013, increased by 48 basis points (bps) from a year ago. Net NPAs on other hand worsened by 44 bps in the same period to 1.68%, according to data put out by the central bank in its annual report.

RBI points out a majority of bad loans in the banking system were on the books of public sector lenders who also constitute a majority of the advances in the banking system. According to the central bank data, gross NPA ratio for public sector banks at the end of March 2013 stood at 3.84%, as compared with 3.17% at the same time last year.

Large public sector lenders like State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BoB) have all shown an increase in their NPAs over the last year, owing to payment defaults from corporates of various sizes and medium and small enterprises. SBI?s gross NPA ratio stood at 4.75% as on March 2013 compared with 4.44% last year. This has worsened to 5.56% as on June 30. Similarly, in case of PNB, the gross NPA ratio stood at 4.3% as on March 31, as against 2.9% last year. As on June 30, PNB?s gross NPA ratio stood at 4.84%.

Moreover, the pipeline for restructured loans in public sector banks shows a gloomy picture of the year ahead. Cumulatively, eight large banks including SBI are now sitting on a pipeline of restructured assets worth over R25,000 crore suggesting the asset quality pressures in the industry are far from over. For state-owned banks, ratio of restructured loans to gross advances stood at 7.21% as on March 2013 compared with 5.74% last year, said RBI report.