India's Battle Against Bad Loans: A Look at Progress and Challenges

By IndraStra Global Editorial Team

Over the past few years, India has been contending with the problem of non-performing loans in its banking industry. Finance Minister Nirmala Sitharaman's revelation in December 2022 that banks had written off a staggering ₹10,09,511 crore in bad loans over the past five financial years sent shockwaves through the nation's financial landscape. This alarming figure prompted the government to take decisive action, including the establishment of the National Asset Reconstruction Company Ltd. (NARCL) as part of the Union Budget for 2021-2022. NARCL's primary mission is to address the mounting stress of bad loans, which amount to around ₹2 lakh crore, in a phased manner.
But what exactly are bad loans? In essence, they are loans that have yet to be adequately serviced for a specific period. Servicing a loan entails paying interest and a portion of the principal amount, per the borrower and bank agreement. This systematic repayment ensures that the principal and accrued interest are eventually paid off. The Reserve Bank of India (RBI) introduced guidelines in 2009 outlining categories of Non-Performing Assets (NPAs) and specifying banks' actions as these bad loans aged. The problem with bad loans is that, over time, the likelihood of full repayment diminishes significantly.
The RBI's 2009 master circular marked the beginning of NPA recognition efforts in India. It mandated that if an asset remained 'doubtful' for a certain period, banks must make provisions for the declining value of that asset over time. In October 2021, a revision made recognition even more stringent. Interestingly, even for standard assets without apparent problems, banks are now required to make provisions based on the sector's risk element. For instance, loans with teaser rates, like some home loans, are deemed riskier and thus require provisions.
In the last five years, Indian banks have been compelled to acknowledge a substantial amount as bad loans. The Minister of State for Finance, Bhagwat Karad, revealed in December that scheduled commercial banks (SCBs) had written off loans worth ₹10.1 lakh crore, with only ₹1.32 lakh crore successfully recovered. This recovery rate amounts to just about 13% of the total write-offs. One possible explanation for this low rate is that even with efficient legal processes, the full repayment of an NPA recognized in a particular year may be delayed, and banks may have to accept significant losses.
The need to recognize NPAs is critical for maintaining a healthy financial system. Both the government and regulatory authorities must accurately assess the financial sector's health to prevent potential crises that could affect lives and livelihoods. India adopted a more aggressive approach towards NPA recognition in the 2014-2015 period, introducing periodic asset quality reviews and measures to prevent the evergreening of loans.
Has this strategy been effective? According to Finance Minister Nirmala Sitharaman, transparent NPA recognition increased the gross NPA percentage from 4.1% in March 2014 to 11.46% in March 2018. However, she also pointed out that with the government's strategy of recognition, resolution, recapitalization, and reforms, NPAs had declined to 5.9% by March 2022.
The battle against bad loans in India remains an ongoing challenge. While recognition has improved transparency and accountability, the recovery of these loans and their impact on the financial system are issues that continue to evolve. Time will ultimately judge whether recoveries will eventually improve and whether India's monetary system can truly overcome the problem of bad loans.

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