The Reserve Bank of India on Tuesday underpinned the need for ensuring the quality of bank credit in the context of financial stability.
"It is important to reiterate this concern, particularly in the context of preserving the recent gains in macro-economic performance and productivity," it said in its mid-term review of Annual Policy for 2006-07.
Healthy credit portfolios would lead to reducing non-performing assets, economy in the requirements of regulatory capital and a greater freeing up of resources it said.
"This will result in augmenting the ability of banks to expand lending further and banks need to recognise this cycle in the monitoring of their loan portfolios," it said.
Pointing out that the demand for credit is growing at above 30 per cent for the third year in a row, the RBI said that sectors such as housing, commercial real estate and retail loans accounted for a major portion of the bank credit.
It said that asset prices continue to remain at elevated levels and cautioned of "overheating."
"An overheating economy is one which is growing rapidly and its productive capacity cannot keep up with resulting demand pressure," it said, adding that emergence of inflationary pressures is usually seen as the first indication of overheating.
However, there is not conclusive evidence of overheating in the Indian economy at the current juncture, the RBI said.
The central bank emphasised the need for monitoring all available indications that point to excess aggregate demand and said that this is "perhaps more relevant now than ever before."