NatWest's provisions against bad and doubtful debts were pounds 1,262m last year against pounds 1,799m the year before.
Together with Barclays, NatWest is now the biggest lender to small companies in Britain.
Lord Alexander said: 'The UK economy is growing steadily, but not dramatically. Lending demand is still subdued. People and businesses are rightly cautious about borrowing more. Increasing income is far from easy.
'But - and this is the good news - bad debts are continuing to decline - indeed rather faster than we expected at the beginning of the year.'
The chairman stressed the bank's determination to develop non-interest income, which increased 12 per cent last year, and foreign operations as a buffer against UK economic cycles.
He said that over the past four years staff numbers in UK branches had fallen by 12,800 to 56,400.
'We seek to treat our people considerately and, wherever possible, to avoid compulsory redundancies,' he said. 'But we have to continue our drive for greater efficiency.'
Lord Alexander also said that the number of written complaints to NatWest's head office dropped by 16 per cent last year to 8,722.Reuse content