World Bank has sounded the warning bells for Indian banks and financial institutions on their high non-performing assets and the risks of suffering losses if interest rate starts rising.

The problems assumes importance in the wake of rising public sector debt at 90 per cent of GDP, the World Bank said in its development policy review report titled 'India-Sustaining Reform, Reducing Poverty'.

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"Since 1992-93, varying but relatively small sums of money have been spent to assist nationalised banks, regional rural banks, Unit Trust of India, Industrial Development Bank of India and Industrial Finance Corporation of India. Another 0.8 per cent of the GDP was identified in 2002-03 to help UTI, IFCI and IDBI," the report said.

World Bank was alarmed at the gross NPA level of Indian banks at 10.4 per cent of advances and net NPAs at 5.5 per cent till March 2002.

Questioning the net NPA figures of banks stated at 1.5 per cent of GDP, the report said, "While some analysts have suggested that NPAs are substantially understated by various 'evergreening' methods, a doubling of the gross NPA figure would put the net NPA at less than seven per cent of bank assets or about 4.5 per cent of GDP."

World Bank also cautioned Indian banks about the "off-balance sheet" operations amounting to 60 per cent of the balance sheet size and said three-fourths were in forward exchange contracts mostly related to exports and imports and often with Reserve Bank of India as the counter-party.