A Paradigm Shift: Unraveling the Improving Landscape of Non-Performing Assets in Indian Banks

A Paradigm Shift: Unraveling the Improving Landscape of Non-Performing Assets in Indian Banks

A Paradigm Shift: Unraveling the Improving Landscape of Non-Performing Assets in Indian Banks


Indian banks have witnessed a remarkable decline in NPAs, reaching their lowest levels since 2015.


GS-03 (Growth and Development) (Indian Economy)


  • Non-Performing assets
  • Restructure Advance
  • Stressed assets
  • Fugitive offender

Mains Questions:

  • Examine the reasons behind the decline in non-performing assets (NPAs) in Indian banks. How has the Insolvency and Bankruptcy Code and the shift towards personal loans influenced this downward trajectory? (250 words)

Dimensions of the Article:

  • The NPA Crisis Unveiled
  • Factors Catalyzing the Decline
  • Unveiling the Pandemic Paradox
  • The Resilient Rebound
  • A Profits Renaissance
  • Write-Offs and Worries
  • Personal Loans’ Paradigm

The NPA Crisis Unveiled:

  • The Indian banking sector witnessed a bleak scenario just four years ago, with its NPA ratio ranking amongst the worst among emerging economies.
  • NPAs, referring to loans that borrowers are unable to repay, plagued the sector. The NPA ratio stood at a staggering 9.2% in the second quarter of 2019, signaling the gravity of the situation.
  • The true extent of bad loans remained concealed until the Reserve Bank of India conducted an extensive Asset Quality Review in 2016, shedding light on the severity of the NPA crisis.

Factors Catalyzing the Decline:

  • Between 2016 and 2019, the NPA ratio remained stubbornly high. However, subsequent years witnessed a decline, even amidst the challenging backdrop of the pandemic.
  • Several factors have played a pivotal role in this positive shift.
    • The implementation of the Insolvency and Bankruptcy Code facilitated the recovery of distressed loans, injecting vitality into the banking system.
    • Banks altered their lending strategies by reducing exposure to industries and bolstering their focus on personal loans. This strategic pivot sought to minimize risks associated with volatile industries while capitalizing on the potential of individual borrowers.

Unveiling the Pandemic Paradox:

  • The onset of the COVID-19 pandemic introduced a fresh set of uncertainties. Questions arose regarding the fate of loan accounts under moratoriums and the impact on NPAs. Moreover, the rapid shift towards personal loans created apprehension.
  • Would borrowers who secured personal loans face difficulties in loan repayment, given the economic strain on industries that employed them was the only question.
  • However, contrary to expectations, the reduction in NPAs during FY20 can largely be attributed to the deliberate write-offs by banks.
  • By writing off NPAs, banks maintain the health of their balance sheets but simultaneously curtail their available capital for fresh lending.

The Resilient Rebound:

  • The recent financial stability report released by the Reserve Bank of India provides insights into the current state of NPAs.
  • Chart 1 depicts the declining trajectory of gross NPAs (GNPAs) and net NPAs, reaching 3.9% and 1% respectively by March 2023, the lowest levels witnessed since 2015. This remarkable progress underscores the resilience of Indian banks in managing their NPAs.

A Profits Renaissance:

  • Chart 2 highlights a marked improvement in the profitability of the banking sector. Return on Assets (RoA), a key performance metric, soared to 1.1% in 2023, a significant recovery from the negative 0.2% recorded in 2018.
  • This resurgence has propelled the Capital to Risk-Weighted Assets Ratio (CRAR) to a record peak of 17.1% in 2023. The surge in CRAR, which assesses a bank’s exposure to riskier loans, reinforces the sector’s overall financial well-being.

Write-Offs and Worries:

  • Chart 3 reveals the downward trend in the ratio of write-offs to GNPAs, reflecting prudent risk management by banks in recent years. However, the ratio witnessed a surge in 2022-23, primarily driven by substantial write-offs by private sector banks.
  • The dependence on write-offs as a key mechanism for NPA reduction raises concerns and necessitates a comprehensive review of the underlying causes.

Personal Loans’ Paradigm:

  • Chart 4 delves into the GNPA ratio of personal loans across various categories such as housing, credit cards, vehicle loans, and education loans.
  • Encouragingly, the ratio has declined consistently across all these segments, showcasing the effectiveness of the shift towards personal loans as a strategy to mitigate NPAs.

Way Forward:

  • As the Indian banking sector embarks on this positive trajectory, certain areas warrant careful attention. The over-reliance on write-offs necessitates a proactive approach towards addressing the root causes of NPAs.
  • Diversifying lending portfolios while ensuring prudential risk management should remain at the forefront of banks’ strategies.
  • Strengthening the implementation of the Insolvency and Bankruptcy Code and fostering transparency in loan classification and reporting will be crucial in maintaining the progress achieved.


The Indian banking sector’s battle against NPAs has witnessed a remarkable turnaround, with NPAs reaching their lowest levels since 2015. Through the combined efforts of regulatory reforms, strategic shifts in lending, and improving asset quality, Indian banks have successfully navigated the challenges posed by the NPA crisis. However, the sustainability of this progress hinges on the sector’s ability to address concerns surrounding write-offs and maintain a robust risk management framework. As the sector forges ahead, the resilience and adaptability demonstrated thus far augur well for its future, offering a glimmer of hope in a transformed landscape.