India’s banking system has recorded one of its strongest recoveries in recent years. On February 9, 2026, Parliament was informed that gross Non-Performing Assets (NPAs) of scheduled commercial banks declined to a historic low of 2.15% by the end of September 2025. This level is even lower than what was seen in 2010–11, marking a significant turnaround after years of stress caused by bad loans and corporate defaults.
What Are NPAs and Why They Matter
- Non-Performing Assets (NPAs) are loans where borrowers fail to repay principal or interest for over 90 days.
- High NPAs weaken banks by reducing profitability and restricting new lending.
- A fall in NPAs indicates better asset quality, stronger underwriting, and improved borrower discipline.
- The decline to 2.15% reflects a healthier banking system capable of supporting economic growth.
Break-up of NPAs Across Bank Categories
- As per RBI data for domestic operations up to September 30, 2025, public sector banks (PSBs) reported a gross NPA ratio of 2.50%, while private sector banks stood at 1.73%.
- Foreign banks operating in India recorded the lowest gross NPAs at just 0.8%.
- Notably, PSBs have shown a sharper improvement since March 2018, narrowing the gap with private banks.
Why Public Sector Banks Showed Stronger Improvement
- Public sector banks witnessed a steeper decline in NPAs due to balance sheet clean-up, recapitalization, and governance reforms.
- According to the government, improved profitability and capital strength have supported better lending practices.
- Reduced NPAs also lowered provisioning requirements, directly boosting bank profits and lending capacity.
Role of RBI and the Government’s 4R Strategy
- The turnaround began after the RBI’s Asset Quality Review (AQR) in 2015, which forced transparent recognition of bad loans.
- This was followed by the government’s 4R strategy – Recognition, Resolution, Recapitalisation, and Reforms.
- These steps addressed stressed assets systematically and prevented further accumulation of bad loans.
Recovery Tools: IBC, SARFAESI and DRTs
- Banks used multiple recovery mechanisms such as Debts Recovery Tribunals (DRTs), the SARFAESI Act, and cases under the Insolvency and Bankruptcy Code (IBC) via the National Company Law Tribunal.
- The government also proposed amendments to IBC to speed up Corporate Insolvency Resolution Processes (CIRPs), further strengthening recovery outcomes.
Improving Slippage Ratio and Future Outlook
- The slippage ratio, which measures fresh addition of NPAs, has consistently improved over the last six years, especially for PSBs.
- This indicates fewer new bad loans and better credit monitoring.
- Together with reforms, it signals long-term stability in India’s banking sector.
Question
Q. Which reform played a major role in resolving stressed assets in India?
A. FRBM Act
B. Banking Regulation Act
C. Insolvency and Bankruptcy Code
D. FEMA