India’s Banks Achieve Record Low NPAs, Signaling Financial Stability

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