Eight-Year Decline in Asset Stress
The gross NPA ratio of SCBs has been on a consistent downward trajectory for the last eight financial years. This sustained decline follows the RBI’s comprehensive Asset Quality Review (AQR) initiated in 2015, which brought transparency to stressed assets and forced banks to recognise bad loans upfront.
Following the AQR, the government implemented its four-pronged ‘4Rs’ strategy—recognition of NPAs, resolution and recovery through effective legal mechanisms, recapitalisation of public sector banks, and reforms in governance and the financial ecosystem.
Public Sector Banks Lead the Recovery
As of September 30, 2025, the gross NPA ratio for public sector banks (PSBs) stood at 2.50 percent, while private sector banks recorded 1.73 percent and foreign banks posted a significantly lower ratio of 0.80 percent.
Notably, PSBs have registered a sharper decline in NPAs compared to private and foreign banks since March 2018, underscoring the impact of targeted reforms and capital infusion.
Profitability and Credit Growth Improve
The sustained reduction in NPAs has resulted in lower provisioning requirements for banks, directly boosting profitability and strengthening balance sheets. Improved asset quality has also enhanced banks’ capacity to extend fresh credit, supporting economic growth.
According to the government, better underwriting standards and risk assessment frameworks have played a critical role in maintaining this improvement.
Slippage Ratio Shows Strong Improvement
Another key indicator of banking health—the slippage ratio, which measures fresh NPAs as a percentage of standard advances—has shown steady improvement. For PSBs, the slippage ratio declined to 0.8 percent by September 2025, significantly lower than the 1.8 percent recorded by private sector banks.
This indicates stronger early detection of stress and more proactive account monitoring in public sector banks.
IBC and Legal Reforms Drive Recoveries
A major contributor to improved asset quality has been the Insolvency and Bankruptcy Code (IBC), which shifted India’s credit culture from ‘debtor in possession’ to ‘creditor in control’. As of March 2025, over 30,000 cases involving defaults worth ₹13.78 lakh crore were settled even before formal admission, reflecting the deterrent impact of the law.
Amendments to the SARFAESI Act and the Recovery of Debt and Bankruptcy Act have further strengthened recovery mechanisms, including faster case disposal and improved oversight of asset reconstruction companies.
Coordinated RBI-Government Approach
The RBI’s prudential framework for early recognition and time-bound resolution of stressed assets, issued in 2019, has complemented government efforts. Banks have also set up specialised stressed asset management verticals and adopted technology-driven early warning systems.
