India’s Banking Turnaround and the Fall in NPAs

Structural Reset in the Banking System

India’s Banking Turnaround and the Fall in NPAs: India’s banking system has entered a phase of structural stability. Economic Survey 2025–26 highlights a sustained fall in stress indicators and a parallel rise in profitability across institutions. This shift reflects policy-driven reforms rather than cyclical recovery alone.

The transition marks a movement from crisis management to system resilience. Improved governance, regulatory discipline, and institutional reforms are now shaping credit behaviour.

Static GK fact: The Reserve Bank of India was established in 1935 under the RBI Act, forming the backbone of India’s financial regulation framework.

Record Decline in NPAs

Gross NPAs (GNPA) and Net NPAs (NNPA) of Scheduled Commercial Banks have fallen to multi-decade lows. Asset quality indicators now reflect disciplined lending and stronger risk assessment frameworks.

Capital strength remains robust with a Capital to Risk-Weighted Assets Ratio (CRAR) of 17.2% (September 2025). This ensures systemic stability even during credit expansion phases. Recovery efficiency has transformed. NPA recovery rates rose from 13.2% in FY18 to 26.2% in FY25, showing faster resolution and reduced credit leakage.

Static GK Tip: CRAR is aligned with Basel norms, which are global banking standards for financial stability.

IBC as the Core Recovery Engine

The Insolvency and Bankruptcy Code (IBC) has become the backbone of India’s credit resolution system. It replaced fragmented laws with a unified, time-bound insolvency framework. From around 1,300 resolved cases, creditors recovered ₹3.99 lakh crore, which equals 94% of fair value and 170% of liquidation value. This reflects strong asset value preservation.

Resolution timelines reduced from 6–8 years to nearly 2 years, strengthening credit discipline across borrowers and lenders. India’s insolvency framework gained global credibility when S&P Global Ratings upgraded India’s insolvency regime to Group B in December 2025.

Profit Revival in Regional Rural Banks

Regional Rural Banks (RRBs) have emerged as rural growth engines. Structural consolidation under the One-State-One-RRB policy reduced RRBs from 196 to 28 by May 2025.

Operational efficiency improved through digital integration and scale economies. RRBs posted a record consolidated net profit of ₹7.6 thousand crore in FY24 and ₹6.8 thousand crore in FY25. They consistently exceeded the 75% priority sector lending target, strengthening rural, agricultural, and MSME credit delivery.

Static GK fact: Priority sector lending includes agriculture, MSMEs, education, housing, and weaker sections.

MSME Credit Expansion

MSMEs have become central to credit growth. Improved credit scoring, digital onboarding, and policy guarantees have reduced lending risk perception. Formal credit access has expanded due to UPI-based transaction histories and digital KYC systems. This links financial inclusion with credit deepening.

The MSME sector now functions as both a growth driver and employment stabiliser in the banking ecosystem.

Microfinance and Financial Inclusion

India’s microfinance sector shows sustained growth. Active borrowers increased from 330 lakh (FY14) to 627 lakh (FY25). The gross loan portfolio reached ₹2.38 lakh crore, reflecting sevenfold expansion. 95% women borrowers and 80% rural clients highlight inclusive penetration.

Branch networks expanded from 11,687 to 37,380, strengthening last-mile financial access. This growth is reinforced by PMJDY, UPI, and digital banking infrastructure.

Static GK Tip: PMJDY was launched in 2014 to ensure universal access to banking services.

Systemic Outcome

The fall in NPAs and rise in profits reflect a systemic transformation. Legal reform, institutional consolidation, digital infrastructure, and regulatory discipline have converged into a stable financial architecture.

India’s banking system is shifting from reactive recovery to proactive resilience.

Static Usthadian Current Affairs Table

India’s Banking Turnaround and the Fall in NPAs: