Banking Sector Reforms

Bad loans at record low, but write-offs still in the mix


From UPSC perspective, the following things are important :

Prelims level: NPA, Writ off, its direct and indirect impact on financial stability

Mains level: NPA's, implications for banks and economy as a whole

What is the news?

  • The latest financial stability report released by the Reserve Bank of India (RBI) shows a continuous decline in both Gross Non-performing assets (GNPAs) and Net NPAs, reaching their lowest levels since 2015.

Central Idea

  • In recent years, the Indian banking sector has witnessed a remarkable turnaround in its non-performing assets (NPA) ratio, marking a significant improvement in its overall health. Just four years ago, Indian banks grappled with the highest NPA ratio among emerging economies.

What are Bad loans/ Non-Performing Assets (NPA’s)?

  • Bad loans refer to loans that are classified as non-performing assets
  • NPA is a term used to classify loans or advances that are in default. It indicates the inability of borrowers to fulfill their repayment obligations to the lender.
  • In general, a loan is classified as an NPA when the borrower fails to make payments for a specified period, typically 90 days or more.

There are two key classifications related to NPAs:

  • Gross Non-Performing Assets (GNPA): This refers to the total amount of loans or advances that have been defaulted by borrowers.
  • Net Non-Performing Assets (NNPA): NNPA is derived by deducting the provision amount from the GNPA. Provision refers to the amount set aside by banks or financial institutions as a precautionary measure to cover potential losses arising from NPAs.

Background and Current Situation

  • During the second quarter of 2019, the NPA ratio in Indian banks stood at a worrisome 9.2%, signifying that nearly one in ten loans had become bad.
  • The severity of the problem was unveiled when the RBI conducted an expansive Asset Quality Review in 2016, exposing the true extent of bad loans.
  • From 2016 to 2019, the NPA ratio remained high, causing apprehension among stakeholders.
  • However, subsequent years witnessed a decline in the NPA ratio, a trend that persisted even during the challenging times of the COVID-19 pandemic.

Factors contributing to the decline in NPAs

  • Insolvency and Bankruptcy Code (IBC): The implementation of the Insolvency and Bankruptcy Code in 2016 played a crucial role in the recovery of sick loans. It provided a structured and time-bound framework for resolving distressed assets, leading to improved NPA management and recovery.
  • Shift towards personal loans: Banks shifted their lending focus from industries to personal loans. This strategic move reduced the exposure to sectors heavily impacted by the pandemic, potentially mitigating the risks of loan defaults and lowering the NPA ratio.
  • Impact of COVID-19-related moratoriums: There were concerns about the potential increase in NPAs resulting from the COVID-19-related moratoriums. However, the data indicated that the moratoriums did not lead to a significant bump in NPAs, as initially expected. This suggests that the measures implemented to support borrowers during the pandemic were effective in preventing a major NPA crisis.
  • Write-offs: The reduction in NPAs, particularly in FY20, can be attributed to the practice of writing off bad loans. Banks voluntarily wrote off NPAs to maintain healthy balance sheets, which had a positive impact on the overall NPA ratio. However, the continued reliance on write-offs raises concerns about the sustainability of this approach in the long run.

What are Write-Offs?

  • Write-offs refer to the practice of removing non-performing assets (NPAs) from a bank’s balance sheet. When a loan becomes irrecoverable and the borrower is unable to repay, the bank may decide to write off the loan as a loss.
  • This means that the bank no longer considers the loan as an asset and removes it from its books.
  • Write-offs are typically done to maintain accurate financial records and reflect the true value of the bank’s assets

Concerns highlighted regarding write-offs

  • Sustainability of NPA Reduction: Write-offs may artificially lower NPAs, but heavy reliance raises doubts about sustainable NPA reduction without effective recovery measures.
  • Adequacy of Provisioning: Insufficient provisions to cover losses due to write-offs can weaken a bank’s financial position and ability to absorb future shocks.
  • Transparency and Accountability: Ensuring transparent and accountable write-off processes is crucial to prevent misuse and maintain trust in the banking system.
  • Impact on Lending Capacity: Write-offs reduce available capital, limiting a bank’s ability to lend and support economic growth. Inadequate replenishment may further constrain lending.

Decline in NPAs: Implications for the banks

  • Improved Asset Quality: A decrease in NPAs indicates an improvement in the asset quality of banks. It suggests that a lower proportion of loans are in default or arrears, reflecting healthier lending practices and reduced credit risk. Banks with lower NPAs are better positioned to maintain stability and profitability in their loan portfolios.
  • Enhanced Financial Health: Declining NPAs contribute to the overall financial health of banks. As the burden of bad loans decreases, banks can allocate resources more efficiently and utilize capital for productive purposes. This improves the banks’ ability to generate profits and strengthens their financial position.
  • Increased Profitability: Lower NPAs positively impact banks’ profitability. When the proportion of bad loans decreases, banks experience fewer loan write-offs and provisioning requirements. This results in lower expenses associated with NPA resolution and provisioning, thereby enhancing profitability and improving the bottom line.
  • Strengthened Capital Position: A decline in NPAs can lead to a strengthened capital position for banks. As they recover or resolve NPAs, banks can allocate capital more effectively and build buffers against potential losses. A stronger capital position provides resilience and stability to the banks, ensuring they can absorb shocks and maintain sustainable lending practices.
  • Improved Investor Confidence: Decreasing NPAs can boost investor confidence in the banking sector. It demonstrates efficient risk management and sound lending practices, attracting investors and potentially leading to increased investments in banks. Enhanced investor confidence can contribute to the stability and growth of the banking sector.
  • Enhanced Lending Capacity: With lower NPAs, banks can allocate more funds towards fresh lending and credit expansion. As the burden of bad loans reduces, banks have more capital available to extend credit to productive sectors of the economy, supporting economic growth and development


  • Indian banks have made remarkable progress in reducing NPAs, as evident from the declining NPA ratios and improved profitability. However, the reliance on write-offs raises concerns about the sustainability of this trend. To ensure long-term stability, banks must prioritize prudent lending practices and effective risk management.

Also read:

Sansad TV Perspective: Health of India’s Banking System

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