ROME, May 2 (Reuters) - Italian banks' bad loans started to decline as a proportion of overall lending in the first quarter of this year, although they are still rising in absolute terms, the Bank of Italy said on Friday.
"The deterioration in banks' loan asset quality has eased," the central bank said in its twice-yearly Financial Stability Report.
"The flow of new bad debts as a ratio to outstanding loans stabilised in the fourth quarter of 2013 and preliminary data indicate that in the first quarter of 2014 it declined," the report said. "However, the volume of non-performing loans is still growing."
A gradual easing of credit contraction and the decline in net non-performing loans (NPLs) are among several signs that Italy is gradually emerging from a two-year long recession.
Italian banking association ABI said last month that net NPLs had fallend to 78.2 billion euros ($108.43 billion) in February from 79.2 billion euros in January.
Gross NPLs topped 162 billion euros in February, ABI said, up from 160.4 billion.
The Bank of Italy report said Italian banks are gradually repaying the money they borrowed from the European Central Bank during the height of the euro zone debt crisis, but at a slower rate than elsewhere in the currency bloc.
Last month 38 of the 112 Italian counterparties that had taken part in the ECB's 3-year refinancing operations had paid back 79 billion euros, or 31 percent of the original borrowing, compared with 62 percent in the other euro zone countries, the Bank of Italy said on Friday. ($1 = 0.7212 Euros) (Reporting By Gavin Jones)