ROME, April 27 (Xinhua) -- Small and medium-sized banks in Italy would still face low levels of profitability in 2018, the country's central bank said on Friday.

In its first Financial Stability Report -- issued twice every year -- the Bank of Italy said the overall quality of the bank credit was increasing steadily.

"Flows of new non-performing loans (NPLs) are back to pre-crisis levels," it stated.

As such, bank profitability was improving, but it was "still very poor for many small and medium-sized banks".

The need for small and medium-sized banks to increase revenues and improve efficiency was made more pressing by the imminent introduction of the Minimum Requirement for own funds and Eligible Liabilities for bail-in (MREL), the central bank warned.

The MREL is a requirement developed by the Single Resolution Board Authority of the European Union (EU) for the EU member states taking part in the banking union. It is seen as a complement necessary to apply the bail-in mechanism, to help banks be more able to absorb losses and restore their capital.

"This might make it necessary for several banks to place new large bond issues on the wholesale market, with negative effects on the average cost of funding," the Bank of Italy explained in the report.

The institute estimated Italy's significant banks may face an aggregate shortfall of eligible liabilities worth between 30 and 60 billion euros (36.3 to 72.6 billion U.S. dollars) at the end of the transition period.

Yet, the Italian banking system overall was in a better state of health compared to the years immediately after the financial crisis, according to the central bank.

Although still substantial for many institutions, in fact, the proportion of NPLs in the banks' balance sheets fell sharply, and especially among banks that made large-scale disposals.

"In the second half of 2017, numerous banks sold a significant amount of their bad loans -- 26.5 billion euros compared with 5.7 billion euros in the first semester -- nearly two thirds of which through securitizations, and in many cases with recourse to the state guarantee scheme," the report read.

Overall, the bad loan stock decreased by 40 billion euros gross of provisions, and by 16 billion euros net of provisions.

The ratio of NPLs to total loans decreased to 14.5 percent (gross of provisions) and to 7.5 per cent (net of provisions), from 16.4 percent and 8.4 percent at the end of June 2017, respectively.