Mumbai, Aug. 30: Banks have improved the sheen on their assets with their gross NPA and net NPA ratios at their lowest in 2005-06 at 3.5 per cent and 1.3 per cent respectively.

The annual report of the RBI said heightened economic activity and better recovery climate reduced the non-performing asset (NPAs) ratio.

Only five banks had net NPAs in excess of five per cent of their net advances.

Financial institutions, urban cooperative banks and non banking finance companies (NBFCs) also improved their net NPA ratio which were at 1.3 per cent, 3 per cent and 1 per cent respectively.

The ratio of gross NPA to gross advances of commercial banks fell to 3.4 per cent in the first quarter of the fiscal from 3.5 per cent in the fourth quarter of 2005-06. For PSU banks this fell to 3.8 per cent from 3.9 per cent.

The upturn in economic credit has generated a sustained demand for credit in the four years preceding this fiscal.

Non-food credit by commercial banks grew at an average annual growth rate of 26.1 per cent between 2002-03 and 2005-06 compared with a 14.5 per cent growth between 1997-98 and 2001-02.

RBI expects the demand for credit to remain buoyant. With their investments in SLR securities fast approaching the statutory requirement, the annual report said that banks will need to intensify efforts to mobilise higher deposits through stable resources to finance higher credit requirements.

However, the higher demand for credit made a marginal dent on the capital adequacy of banks in the last fiscal.

The RBI said the banks were well placed vis-a-vis their capital requirements, notwithstanding the modest decline in the aggregated capital ratios.

The apex bank attributes the decline in the capital adequacy ratio (CAR) to the higher rate of increase in risk weighted assets compared with the expansion in capital.