Mumbai, Dec 31 (IANS): The asset quality of banks improved over the first-half of this fiscal with the gross non-performing assets (GNPAs or bad loans) ratio declining to 10.8 per cent in September, from 11.5 per cent in March, the Reserve Bank of India (RBI) said on Monday.

In its Financial Stability Report (FSR) released on the final day of 2018, the RBI also said that the net NPAs' ratio also fell over the period in consideration to 5.3 per cent in September, as against 6.2 per cent in March.

"The asset quality of banks showed an improvement with the GNPA ratio of SCBs (scheduled commercial banks) declining from 11.5 per cent in March 2018 to 10.8 per cent in September 2018. Under the baseline scenario, GNPA ratio may decline from 10.8 per cent in September 2018 to 10.3 per cent in March 2019," an RBI statement said.

"In a sign of possible recovery from the impaired asset load, the GNPA ratio of both public and private sector banks showed a half-yearly decline, for the first time since March 2015, the financial year-end prior to the launch of asset quality review (AQR)," the report said.

GNPAs of state-run banks have also improved to 14.8 per cent in September 2018 from 15.2 per cent in March, it said.

According to the report, private sector banks saw their gross NPAs falling during April-September from 4 to 3.8 per cent in September 2018 in March 2018.

The FSR reflects the assessment on risks to financial stability, as also the resilience of the financial system.

"Overall assessment of systemic risks India's financial system remains stable, and the banking sector shows signs of improvement, even though the global economic environment and the emerging trends in financial sector pose challenges," the statement said.

"Spill-over risk to emerging economies engendered by tightening of financial conditions in advanced economies, protectionist trade policies and global geopolitical tension have significantly increased."

In his foreword to the FSR, new RBI Governor Shaktikanta Das said the banking sector is on course to recovery vis-a-vis the NPAs, but state-run banks need reforms in governance.

"After a prolonged period of stress, the banking sector appears to be on course to recovery as the load of impaired assets recedes," Das said.

The weaker banks among the state-run ones need to be supported through recapitalisation, he said.

Although current NPA levels remain high, the Governor said that stress tests done by the RBI have pointed to an improvement in the ratio in future.

"The immense effort put in by the stakeholders so far is required to be buttressed with substantive reforms in governance and oversight regime, supported by recapitalisation of weak PSBs (public sector banks)," he said.

Earlier this month, the government committed an additional Rs 41,000 crore in the current fiscal for recapitalisation of PSBs.