Reserve Bank of India Governor Shaktikanta Das on Monday said that the banking sector is on the “course to recovery” as a result of decrease in non-performing assets. However, state-run banks need reforms in governance and the weaker ones should be supported through recapitalisation, Das said in his foreword to the central bank’s half-yearly Financial Stability Report.

“After a prolonged period of stress, the banking sector appears to be on course to recovery as the load of impaired assets recedes,” he said. Das added that the sector had witnessed its first half-yearly decline in gross NPA ratio since September 2015 and an improve in provision coverage ratio, which is the ability of a bank to withstand stress.

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According to the report, the asset quality of banks showed an improvement, with gross NPA ratio declining to 10.8% in September this year from 11.5% in March. For the state-run banks, the ratio improved to 14.8% in September from 15.2% in March. The net NPA ratio dipped to 5.3% in September as against 6.2% in March.

The gross NPA ratio of all banks may further reduce to 10.3% by March 2019, the report added.

Even though the current NPA levels are high, stress tests done by the central bank have shown that the ratio will improve in the future, he said. However, there is a need for operational improvements at public sector banks, he added.

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“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],” said Das, who took over as RBI governor after Urjit Patel resigned earlier this month.

Das said that banks as well as non-banking institutions need to be diligent and follow sound risk management practices to support the growth needs of the economy.