A Non-Performing Asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days or more. In India, banks are required to classify NPAs into three further categories based on the period for which the asset has remained non-performing:

1. Sub-standard Assets: Assets which have remained NPAs for a period less than or equal to 12 months.
2. Doubtful Assets: Assets which have remained in the sub-standard category for a period of 12 months.
3. Loss Assets: Where the loss has been identified by the bank or internal/external auditors, but the amount has not been written off wholly.

Causes of Rising NPAs in India

The NPA crisis, particularly the “Twin Balance Sheet Syndrome,”(simultaneous stress on the balance sheets of both Indian Corporates and Banks ) was driven by a mix of internal and external factors:

1. Large-scale infrastructure projects (Power, Steel, Roads) faced delays due to environmental clearances, land acquisition hurdles, and policy paralysis.
2. Economic Slowdown: The global commodity price crash and domestic slowdown impacted the debt-servicing capacity of corporate borrowers.
3. During the boom period (2004–2008), banks practiced “incestuous lending” without rigorous credit appraisal or “Gold Plating” of projects by promoters.
4. Willful Defaults: Cases where borrowers have the capacity to repay but intentionally divert funds (e.g., the Vijay Mallya or Nirav Modi cases).
5. Restructuring (Evergreening): For years, banks used Corporate Debt Restructuring (CDR) to hide bad loans by providing fresh loans to pay off old ones, a practice eventually halted by the RBI.

Steps Taken to Resolve the NPA Crisis

The Government and RBI have shifted from “Recognition” to “Resolution” through a multi-pronged strategy:

Legislative & Institutional Framework

1. Insolvency and Bankruptcy Code (IBC), 2016: A landmark shift from “debtor-in-possession” to “creditor-in-control.” It provides a time-bound process for insolvency resolution.
2. NARCL (Bad Bank): The National Asset Reconstruction Company Ltd. was set up to take over large stressed assets from banks, cleaning up their balance sheets to trigger fresh lending.
3. SARFAESI Act, 2002: Allows banks to auction residential or commercial properties of defaulters to recover loans without court intervention.

Regulatory Measures (RBI)

1. Asset Quality Review (AQR): Initiated in 2015 to force banks to identify stressed accounts correctly rather than hiding them.
2. Prompt Corrective Action (PCA): A framework where the RBI imposes restrictions on banks (like dividend distribution or branch expansion) if their NPA levels cross certain thresholds.

Structural Reforms

1. The 4R Strategy: Recognition, Resolution, Recapitalization, and Reforms.
2. Public Sector Bank (PSB) Mergers: Consolidation of 27 PSBs into 12 to create “NextGen” banks with higher risk-appetite and better credit monitoring.
3. Mission Indradhanush: A seven-pronged plan to revamp the functioning of PSBs, including governance reforms and the creation of the Financial Services Institutions Bureau (FSIB).

Conclusion

While the Gross NPA ratio of Scheduled Commercial Banks has significantly declined (reaching a multi-year low of below 3% in 2024-25), the challenge remains in the “slippage” of MSME loans and retail credit. The long-term solution lies in strengthening the Early Warning Signals (EWS) and ensuring that the IBC process remains time-efficient to prevent the erosion of asset value.