India’s NPA Story: How Eight Years of Reform Rebuilt the System

NEW DELHI: In March 2018, roughly one in every nine rupees lent by an Indian scheduled commercial bank was not coming back. The gross non-performing asset ratio of the banking system had reached 11.18 percent, a number that reflected not just poor lending decisions but years of accumulated stress hidden behind restructured loan classifications. Banks had been maintaining failing corporate advances as standard assets on paper while the underlying businesses deteriorated. The credit transmission channel of the broader economy was beginning to weaken and public sector banks were posting negative returns on both assets and equity.

By September 2025, that same ratio stood at 2.05 percent. The journey between those two numbers is a story of sequenced macroprudential policy resulted after eight years of deliberate interventions, each designed to enable the next and to together rebuilt the foundation of Indian banking from the ground up.

The Recognition That Had to Come First

The sequence began in August 2015 when the Reserve Bank of India, under Governor Raghuram Rajan, launched the Asset Quality Review. The AQR did something deceptively straightforward: it required banks to classify loans based on actual repayment behaviour rather than the restructuring labels that had been applied to avoid recognising losses. Within months the gross NPA ratio moved from 4.28 percent in March 2015 to 7.48 percent in March 2016 and continued rising toward its eventual peak.

That initial deterioration was the policy working as intended. Stress that had accumulated over years of large infrastructure lending  in steel, power and road projects delayed by land acquisition problems and regulatory bottlenecks was now being brought into the open for the first time. Recognition was painful in the short term and necessary in every other sense. You cannot resolve what has not been acknowledged.

The Statutory Framework That Changed Borrower Behaviour

Parliament enacted the Insolvency and Bankruptcy Code in May 2016, consolidating India’s fragmented recovery landscape into a single time-bound statutory framework. Under the previous mechanisms the Board for Industrial and Financial Reconstruction, Lok Adalats and Debt Recovery Tribunals promoters could shelter behind continuous moratoriums while retaining control of failing businesses, often allowing asset values to erode for years before any resolution was reached.

The IBC reversed this entirely. Once an insolvency petition was admitted by the National Company Law Tribunal, existing management was suspended and an independent Insolvency Professional took operational control under the supervision of a Committee of Creditors. The promoter either settled or lost the company. That credible shift in power altered how borrowers engaged with their creditors well before cases reached the courtroom. By March 2026, more than 30,000 applications involving defaults of nearly Rs 14 lakh crore had been settled and withdrawn before formal admission into the insolvency process. The IBC’s most significant contribution to India’s banking recovery may be this behavioural deterrence and hence the resolutions that never needed a tribunal because the threat of one was sufficient.

Parliament also amended the SARFAESI and RDDBFI Acts in August 2016, creating parallel tracks for physical collateral recovery outside the insolvency courts. District Magistrates were given strict 30-day timelines to assist secured creditors in taking possession of assets. NBFCs with assets above Rs 100 crore were brought within the SARFAESI framework for the first time, widening the recovery net considerably.

The Capital Infusion That Prevented a Credit Freeze

Recognising bad loans honestly depleted bank capital. By late 2017 the depletion had become acute enough to require direct government intervention. The sovereign recapitalisation package announced in October 2017 totalled Rs 2.11 lakh crore, structured primarily through specialised recapitalisation bonds. Banks subscribed to the bonds and the government simultaneously used the proceeds to purchase equity in the subscribing banks thus strengthening capital ratios without requiring immediate cash outlays from the budget. Combined with direct budgetary support and controlled equity dilution, the injection restored the underwriting capacity of public sector banks at a critical moment and prevented the systemic credit contraction that capital depletion would otherwise have triggered.

The Ministry of Finance formalised these efforts under the 4R framework: Recognition, Resolution, Recapitalisation and Reforms integrating the operational changes being driven through the Enhanced Access and Service Excellence programme with the structural statutory work underway simultaneously.

The Financial Results That Followed

The payoff from this sequence became visible between FY23 and FY25 as the cumulative effect of lower provisioning requirements flowed through to bank earnings. The fresh slippage ratio that is the rate at which performing loans were newly turning bad, declined from 1.5 percent in FY24 to 1.3 percent in FY25. Provision coverage ratios reached 93.14 percent by March 2025, meaning banks had already set aside sufficient buffers against existing stress. Credit costs fell and operating earnings strengthened substantially.

Scheduled commercial banks recorded an aggregate net profit of Rs 4.01 lakh crore in FY25 that was a historically high figure driven by this mechanical improvement in credit costs rather than any single extraordinary event. Return on assets reached 1.37 percent and return on equity reached 14.09 percent both at multi-decade highs. Public sector banks contributed Rs 1.78 lakh crore in net profit, compared to a combined loss in FY18. Systemic credit expanded from Rs 66.91 lakh crore in FY18 to Rs 181.34 lakh crore by March 2025, with the capital adequacy ratio of the system reaching 17.36 percent, a well above Basel III requirements.

The Data in Full

The year-by-year trajectory illustrates how long the recognition-to-recovery cycle takes and how consistently the direction of travel held once the policy sequence was in place.

Sources: RBI Financial Stability Reports, Department of Financial Services, RBI Report on Trend and Progress of Banking in India

The decline in public sector bank gross NPAs from 14.58 percent to 2.30 percent is the most direct measure of the structural improvement achieved over this period.

Where the Work Continues

The balance sheet recovery is substantive and well-documented. The legal recovery machinery, which operates separately from bank accounting, is at an earlier stage of its own improvement arc. ICRA’s IBC@10 retrospective published in May 2026 noted that recovery rates against admitted claims fell to 23 percent in FY26 and that average resolution timelines had stretched to 744 days against the statutory limit of 270 days. Real estate and construction insolvencies, which account for 41 percent of ongoing cases are particularly complex due to competing claims from homebuyers, financial creditors and local development authorities.

Parliament addressed these structural pressures through the Seventh Amendment to the IBC enacted in April 2026. The amendment mandates admission or rejection of petitions within 14 days of filing, separates operational rehabilitation from proceeds distribution into two sequential approvals and clarifies the priority waterfall for secured financial creditors. These are targeted refinements to a framework that has already demonstrated its core effectiveness. The trajectory of the legal recovery system mirrors the earlier trajectory of the balance sheets which is still improving, at a pace that reflects the genuine complexity of what it is being asked to resolve.

The 2.05 percent gross NPA ratio of September 2025 is the output of a decade of compounding policy decisions that each built on the last. The AQR forced transparency, the IBC created consequences, SARFAESI accelerated collateral recovery and Recapitalisation bonds prevented a systemic credit freeze. Together they produced the healthiest banking system India has seen since the liberalisation era.

About the Author

Dipanshu Chaturvedi

Author

Dipanshu Chaturvedi is a writer at Beats in Brief, covering contemporary issues across current affairs. He has interests in geopolitics, the economy, and technology, and focuses on emerging trends and policy developments. His work emphasizes clarity, depth, and critical insight.

View All Posts