Non-Performing Assets (NPAs): Evolution, Impact and Institutional Reforms

Int. Jr. of Contemp. Res. in Multi. PEER-REVIEWED JOURNAL Volume 4 Issue 6 [NovDec] Year 2025 312 © 2025 Madhvi. This is an open-access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY NC ND).https://creativecommons.org/licenses/by/4.0/ Research Article Non-Performing Assets (NPAs): Evolution, Impact and Institutional Reforms Madhvi * Department of Commerce, I.B.(PG) College, Panipat, Haryana, India Corresponding Author: *Madhvi DOI: https://doi.org/10.5281/zenodo.17852861 Abstract Manuscript Information The issue of Non-Performing Assets (NPAs) has emerged as one of the most critical challenges confronting the Indian banking sector. This paper examines the extent, causes, and implications of NPAs on the financial health of Indian banks, emphasising their impact on profitability, liquidity, and capital adequacy. Using secondary data drawn from the Reserve Bank of India (RBI) reports, Ministry of Finance, Indian Banks’ Association (IBA) publications, and studies, this research provides a comprehensive evaluation of the NPA crisis and its macroeconomic consequences. The findings reveal that NPAs significantly weaken the earning potential of banks, restrict their lending capacity, and increase provisioning burdens, thereby deteriorating overall asset quality. The evolution of NPAs from the post-liberalisation era to the contemporary financial landscape shows that economic slowdowns, weak credit appraisal mechanisms, political interference, and governance inefficiencies have compounded the crisis. While government initiatives such as the SARFAESI Act (2002), Insolvency and Bankruptcy Code (2016), and RBI’s Asset Quality Review have contributed to some recovery and accountability, persistent challenges remain due to structural inefficiencies and delayed resolution processes. The study concludes that sustainable banking health in India demands continuous monitoring, improved credit discipline, and robust institutional reforms to ensure a balance between credit expansion and risk management. ▪ ISSN No: 2583-7397 ▪ Received: 13-10-2025 ▪ Accepted: 25-11-2025 ▪ Published: 08-12-2025 ▪ IJCRM:4(6); 2025: 312-319 ▪ ©2025, All Rights Reserved ▪ Plagiarism Checked: Yes ▪ Peer Review Process: Yes How to Cite this Article Madhvi. Non-Performing Assets (NPAs): Evolution, Impact and Institutional Reforms. Int J Contemp Res Multidiscip. 2025;4(6):312-319. Access this Article Online www.multiarticlesjournal.com KEYWORDS: Non-Performing Assets (NPAs), Indian Banking Sector, Financial Health, Credit Risk, Asset Quality, Insolvency and Bankruptcy Code, RBI Reforms. Int. Jr. of Contemp. Res. in Multi. PEER-REVIEWED JOURNAL Volume 4 Issue 6 [NovDec] Year 2025 313 © 2025 Madhvi. This is an open-access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY NC ND).https://creativecommons.org/licenses/by/4.0/ 1. INTRODUCTION The Indian banking sector plays a pivotal role in driving the nation’s economic growth by mobilising savings, extending credit, and ensuring the stability of financial intermediation. Over the past three decades, the sector has witnessed several reforms—from the post-liberalisation phase of the 1990s to the recent digital transformation era. Yet, despite the progressive reforms, one of the most persistent and complex challenges that continues to undermine the financial health of Indian banks is the growing burden of Non-Performing Assets (NPAs). The term “NPA” refers to loans or advances where interest or principal payments remain overdue for more than 90 days. These assets not only reflect the inefficiency of banks in managing credit risk but also act as a mirror of the underlying weaknesses in the economic and regulatory framework. The phenomenon of NPAs in India cannot be analysed in isolation; it is deeply intertwined with macroeconomic cycles, governance failures, sectoral vulnerabilities, and the broader policy environment. In the Indian context, NPAs have been both a symptom and a cause of financial distress. When the economic environment deteriorates—such as during industrial slowdowns, agricultural distress, or global crises—borrowers struggle to service their loans, leading to a surge in NPAs. Conversely, a high level of NPAs restricts banks’ lending capacity, affecting economic recovery and growth. Thus, the relationship between NPAs and the financial health of banks forms a vicious cycle that policymakers have been trying to break since the 1990s [1]. Historically, the roots of India’s NPA problem trace back to the pre-liberalisation period, when public sector banks were primarily used as instruments of social and developmental policy rather than commercial enterprises. Directed lending to priority sectors such as agriculture and small-scale industries, often influenced by political considerations, resulted in poor credit discipline and weak recovery mechanisms [2]. The liberalisation of the 1990s exposed Indian banks to competitive pressures and greater scrutiny. However, the legacy of poor governance, inadequate risk management practices, and a lack of accountability continued to persist, paving the way for recurrent waves of NPA accumulation. The seriousness of the problem was first officially acknowledged when the Narasimham Committee (1991) recommended the recognition and reduction of NPAs as a key reform priority. It led to the introduction of prudential norms in 1992–93, which redefined asset classification and provisioning standards in line with international practices. The subsequent years saw the creation of institutional frameworks such as the Debt Recovery Tribunals (DRTs) in 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002, and, most notably, the Insolvency and Bankruptcy Code (IBC) in 2016. Each of these interventions sought to strengthen the mechanisms for loan recovery, improve credit discipline, and restore the financial soundness of banks [3]. Despite these efforts, NPAs have remained a chronic issue, particularly within the Public Sector Banks (PSBs), which dominate the Indian banking landscape with nearly 60–65% of total banking assets. According to the Reserve Bank of India’s Financial Stability Report (2022), the Gross NPA ratio of scheduled commercial banks, which had peaked at 11.2% in March 2018, declined to 5.9% by March 2022 due to proactive recognition, provisioning, and resolution efforts [4]. However, this decline, while significant, masks several underlying concerns. The reduction was largely driven by large-scale write-offs and restructuring rather than actual recoveries. Moreover, the COVID-19 pandemic and subsequent economic disruptions have again raised fears of a potential resurgence in stressed assets, particularly among small and medium enterprises (SMEs) and retail borrowers [5]. The financial health of banks, in the context of NPAs, can be understood through several interconnected parameters: profitability, capital adequacy, liquidity, and credit growth. A rise in NPAs directly impacts banks’ profitability by reducing interest income and increasing provisioning requirements. It also erodes the capital base, as higher provisions reduce the net worth, thereby affecting the Capital Adequacy Ratio (CAR). In turn, weak capital adequacy restricts the ability of banks to expand their lending operations, leading to a slowdown in credit growth and economic activity. From a systemic perspective, the persistence of high NPAs undermines depositor confidence, increases the cost of borrowing, and can potentially trigger contagion effects across the financial system [6]. The issue of NPAs is not merely financial but also structural and behavioural. Several studies have attributed the rise of NPAs to poor credit appraisal systems, inadequate postdisbursement monitoring, political interference in lending decisions, and moral hazard arising from repeated government bailouts [7]. The Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring (SDR) mechanisms introduced in the 2000s and 2010s, though well-intentioned, often led to “evergreening” of loans—where bad loans were rolled over to avoid recognition as NPAs. Such practices delayed the recognition of stress and aggravated the problem in the long term [8]. From a macroeconomic standpoint, the accumulation of NPAs has a multiplier effect. It not only weakens the financial sector but also constrains the overall investment climate. Empirical evidence from Indian and international studies has shown that banking crises induced by high NPAs tend to reduce GDP growth by up to 1–2 percentage points annually, primarily through their adverse impact on credit availability to productive sectors [9]. This creates a dual challenge for policymakers: ensuring the stability of the financial system while maintaining credit flow to sustain growth. In the post-2016 period, the Indian government and the RBI adopted a more assertive stance toward resolving NPAs through the Asset Quality Review (AQR), the Prompt Corrective Action (PCA) framework, and the IBC. These measures brought greater transparency and accountability into the system, forcing banks to recognise bad assets earlier and take corrective actions. Yet, despite the progress, the challenge remains structurally rooted in governance deficiencies, sectoral concentration risks Int. Jr. of Contemp. Res. in Multi. PEER-REVIEWED JOURNAL Volume 4 Issue 6 [NovDec] Year 2025 314 © 2025 Madhvi. This is an open-access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY NC ND).https://creativecommons.org/licenses/by/4.0/ (especially in infrastructure, power, and steel), and cyclical economic shocks. The present study, therefore, aims to analyse the impact of NPAs on the financial health of Indian banks through an integrative approach, combining both macroeconomic and micro-financial perspectives. It seeks to explore the evolution of NPAs, their causes, and their repercussions on profitability, liquidity, and capital structure. Furthermore, it evaluates the effectiveness of policy responses—ranging from legal reforms to institutional interventions—in mitigating the problem and ensuring the long-term stability of the Indian banking system. By synthesising data from the RBI, Ministry of Finance, and empirical studies published in Scopus and Google Scholarindexed journals, this paper endeavours to contribute to the ongoing discourse on financial sector resilience in India’s growth story. 2. REVIEW OF LITERATURE The issue of Non-Performing Assets (NPAs) has attracted considerable academic and policy attention in India, especially since the liberalisation of the banking sector in the early 1990s. The literature on NPAs encompasses several dimensions— macroeconomic determinants, bank-specific factors, sectoral vulnerabilities, policy responses, and their implications for the financial health and stability of the banking system. This section synthesizes the major strands of research on NPAs in India and situates them within the broader international discourse on banking crises and asset quality management. Early studies on NPAs in India emerged in the wake of the Narasimham Committee Report (1991), which highlighted the need for transparent asset classification and provisioning norms. Researchers such as Reddy (2004) and Mohan (2005) analysed the transition of Indian banks from developmental institutions to commercially oriented entities, arguing that the persistence of NPAs was partly a result of historical lending practices and policy-driven credit allocation [10]. The introduction of prudential norms in the 1990s compelled banks to recognise and disclose bad loans, revealing the true extent of financial stress that had previously remained hidden. In the post-liberalisation period, scholars like Misra and Dhal (2010) examined the macroeconomic determinants of NPAs in India using time-series econometric models. Their findings demonstrated that GDP growth, inflation, and interest rate differentials significantly influenced the trajectory of NPAs. During periods of economic expansion, improved corporate earnings and household incomes facilitated loan repayment, leading to lower NPAs. Conversely, during economic downturns, especially after 2008, the asset quality of banks deteriorated sharply, underscoring the cyclical nature of credit risk [11]. Similarly, Dash and Kabra (2010) noted that banks’ exposure to volatile sectors such as infrastructure, real estate, and power amplified their vulnerability to NPAs during periods of market contraction. A significant contribution to the literature came from Ghosh (2015), who explored the bank-specific determinants of NPAs across public and private sector banks. Using panel data techniques, the study found that management quality, efficiency ratios, and capital adequacy had a statistically significant impact on the accumulation of NPAs. Public sector banks (PSBs) were found to exhibit higher NPA ratios than private banks due to lower operational efficiency, inadequate risk management systems, and greater exposure to politically influenced lending [12]. The findings resonated with global evidence from countries such as Japan and South Korea, where government-controlled banks often displayed higher levels of impaired assets compared to their private counterparts [13]. The structural factors underlying the NPA problem have also been explored in depth. According to Batra (2003) and Kumar (2013), the inefficiency of legal recovery mechanisms, coupled with delays in judicial processes, contributed substantially to the persistence of bad loans. Before the enactment of the SARFAESI Act (2002), banks had limited recourse in enforcing collateral or recovering dues, resulting in prolonged litigations. The creation of Asset Reconstruction Companies (ARCs) and the introduction of the Debt Recovery Tribunals (DRTs) were seen as major institutional reforms aimed at expediting recovery. However, empirical assessments by Bhattacharya and Roy (2017) suggest that while SARFAESI improved recovery rates initially, its effectiveness diminished over time due to operational inefficiencies, overburdened tribunals, and inadequate capital in ARCs [14]. The global financial crisis of 2008 marked a turning point in the trajectory of NPAs. Studies by Ranjan and Dhal (2018) demonstrated that the slowdown in investment and trade led to stress in corporate balance sheets, particularly in sectors such as steel, power, and infrastructure. This sectoral concentration of credit exposure aggravated the asset quality crisis among Indian banks. Subsequent research by Raj and Dhal (2020) established a strong link between the credit boom of 2004–2008 and the NPA surge in the following decade, emphasising how aggressive lending during growth phases often translates into higher defaults when economic conditions reverse [15]. Comparative analyses between public and private sector banks reveal that governance and managerial autonomy play a critical role in NPA management. According to Singh and Sharma (2018), private banks have demonstrated superior asset quality owing to better credit appraisal systems, decentralised decisionmaking, and stricter performance accountability. In contrast, PSBs have often been constrained by bureaucratic processes, a lack of autonomy in loan approvals, and politically motivated lending. Moreover, government recapitalisation of PSBs has occasionally created a moral hazard, reducing the incentive for prudent credit management [16]. At the policy level, the Reserve Bank of India (RBI) has implemented multiple frameworks to address the NPA crisis. The Corporate Debt Restructuring (CDR) mechanism, introduced in 2001, the Joint Lenders’ Forum (JLF), and the Strategic Debt Restructuring (SDR) mechanism were designed to facilitate collective decision-making among lenders and ensure timely resolution. However, several empirical evaluations, including those by Mohanty and Ghosh (2019), revealed that these frameworks were often misused by Int. Jr. of Contemp. Res. in Multi. PEER-REVIEWED JOURNAL Volume 4 Issue 6 [NovDec] Year 2025 315 © 2025 Madhvi. This is an open-access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY NC ND).https://creativecommons.org/licenses/by/4.0/ corporates and banks to “evergreen” loans rather than recognise and resolve them [17]. As a result, the true scale of NPAs remained understated until the RBI’s Asset Quality Review (AQR) in 2015–16 brought greater transparency to the balance sheets of banks. The Insolvency and Bankruptcy Code (IBC), enacted in 2016, has been hailed as a landmark reform in the literature. Studies such as those by Sengupta and Sharma (2020) and Rajan (2021) highlight that the IBC has significantly improved the legal infrastructure for insolvency resolution, reduced the time for case disposal, and enhanced recovery rates compared to previous mechanisms. Nonetheless, challenges persist in terms of judicial delays, limited capacity of the National Company Law Tribunal (NCLT), and the frequent suspension of proceedings during economic crises such as the COVID-19 pandemic [18]. Moreover, researchers such as Verma and Singh (2022) argue that while the IBC has enhanced accountability, its success depends heavily on complementary reforms in credit governance, managerial accountability, and financial disclosure norms [19]. The literature also points toward the macro-financial linkages of NPAs. Empirical research by Beck and Laeven (2020) using cross-country data indicates that high NPA ratios are associated with lower credit growth, reduced profitability, and weaker capital buffers. In the Indian context, Sharma and Goyal (2021) employed a vector autoregression (VAR) framework to establish that NPAs exert a negative long-term impact on GDP growth through their effect on bank lending. The study emphasised that persistent NPAs act as a drag on economic momentum by reducing banks’ risk appetite and shifting focus from productive lending to balance sheet repair [20]. Recent literature following the COVID-19 crisis has expanded the scope of inquiry to include emerging risks in retail and MSME segments. Gupta (2022) and Agarwal (2023) observed that the pandemic-induced moratoriums and restructuring schemes temporarily masked the true extent of NPAs, creating potential “latent stress” in the system. Their research highlights that while regulatory forbearance helped sustain credit flow during the crisis, it also delayed the recognition of stress, thereby complicating post-pandemic asset quality assessments [21]. Similarly, the shift toward digital lending and fintechbased credit models has introduced new forms of risk, including algorithmic bias and data-driven overexposure, which the existing regulatory frameworks are still evolving to address [22]. Synthesising the above body of work, it is evident that NPAs in India represent a multifaceted challenge—economic, institutional, and behavioural. While macroeconomic fluctuations and sectoral shocks explain the cyclical nature of NPAs, governance failures and regulatory weaknesses account for their persistence. The literature converges on the view that resolving NPAs requires a balanced mix of regulatory discipline, market-based incentives, legal reforms, and managerial accountability. Moreover, empirical studies consistently show that a reduction in NPAs enhances not only bank profitability and credit growth but also broader financial stability and economic resilience. 3. METHODOLOGY This study is entirely based on secondary data collected from authentic sources such as the Reserve Bank of India (RBI) reports, Ministry of Finance publications, Indian Banks’ Association (IBA) statistics, Economic Surveys, and peerreviewed Scopus and Google Scholar-indexed research articles to analyse the impact of NPAs on the financial health of Indian banks. Evolution of NPAs in India The problem of Non-Performing Assets (NPAs) in India has evolved significantly over the past three decades, reflecting both structural weaknesses in the financial system and the changing dynamics of credit expansion. Understanding this evolution is crucial to contextualising the present challenges faced by Indian banks in maintaining financial stability and profitability. In the pre-reform era (before 1991), Indian banks largely operated under a directed credit system where lending to priority sectors such as agriculture, small-scale industries, and public enterprises was mandated by government policy. Due to the lack of proper risk assessment mechanisms and political influence in lending, loan defaults were often overlooked or restructured rather than recognised as bad debts. The concept of NPAs was formally introduced only after the implementation of the Narasimham Committee Report (1991), which marked a structural reform in the Indian banking sector by aligning it with international prudential norms [1]. During the 1990s and early 2000s, the Reserve Bank of India introduced the prudential norms on income recognition, asset classification, and provisioning (IRACP). This transition brought transparency and discipline in recognising NPAs, as banks were now required to classify loans into standard, substandard, doubtful, and loss assets based on repayment performance. Although initial NPA levels were high— exceeding 15% of total advances in the mid-1990s—gradual reforms, improved supervision, and partial privatisation of banking services reduced NPAs significantly by the early 2000s [2]. The 2000–2008 phase was characterised by strong credit growth driven by liberalisation, infrastructure expansion, and the real estate boom. However, the focus on aggressive lending without adequate credit appraisal led to a build-up of potential stress. The global financial crisis of 2008 further exposed vulnerabilities in India’s corporate lending segment. Several large projects became unviable due to delayed clearances, cost overruns, and market slowdowns, resulting in a surge of restructured loans that masked the true scale of NPAs [3]. The period between 2012 and 2017 is often described as the most challenging phase in India’s banking history with respect to NPAs. The Reserve Bank of India’s Asset Quality Review (AQR), initiated in 2015 under Governor Raghuram Rajan, revealed that banks had been underreporting stressed assets for Int. Jr. of Contemp. Res. in Multi. PEER-REVIEWED JOURNAL Volume 4 Issue 6 [NovDec] Year 2025 316 © 2025 Madhvi. This is an open-access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY NC ND).https://creativecommons.org/licenses/by/4.0/ years. Once reclassification was enforced, the gross NPA ratio for public sector banks rose sharply—from 4.3% in 2013 to 11.6% in 2018 [4]. This exposed the magnitude of corporate loan defaults, especially in infrastructure, steel, and power sectors. In response, the government and the RBI introduced several corrective measures. The Insolvency and Bankruptcy Code (IBC), enacted in 2016, became a game-changer, providing a structured mechanism for debt resolution and recovery. It replaced earlier fragmented frameworks such as the SARFAESI Act (2002) and Debt Recovery Tribunals (DRTs). Through IBC, banks gained the ability to recover dues through legal insolvency proceedings, significantly improving recovery timelines and accountability among borrowers [5]. The post-IBC era (2017 onwards) witnessed gradual stabilisation, as banks increased provisioning coverage and undertook large-scale balance sheet clean-ups through recapitalisation and mergers. The government’s PSB recapitalisation program (2017–2021) injected over ₹3.1 lakh crore to strengthen capital adequacy and absorb loan losses. According to the RBI Financial Stability Report (2023), the gross NPA ratio of scheduled commercial banks fell to around 3.9%, the lowest in a decade, reflecting improved asset quality, stronger regulatory oversight, and a more cautious lending approach [6]. However, challenges persist. The COVID-19 pandemic (2020– 2022) temporarily disrupted repayment capacities across MSME and retail borrowers, compelling the RBI to announce moratoriums and restructuring schemes under the Resolution Framework for COVID-19-related Stress. Although this prevented an immediate spike in NPAs, it also deferred recognition of potential stress that may emerge in the medium term [7]. In recent years, with the adoption of technological tools in credit monitoring, AI-based risk assessment models, and the creation of the National Asset Reconstruction Company Limited (NARCL) in 2021, the government has aimed to institutionalise bad loan management and ensure long-term resilience of the financial system. The continuous decline in NPA ratios across both public and private sector banks suggests that the Indian banking sector has entered a phase of relative stability, albeit with a renewed emphasis on prudence and governance [8]. Thus, the evolution of NPAs in India tells a story of cyclical stress, reform-driven recovery, and institutional learning. It underlines how systemic reforms—particularly the IBC and stricter regulatory norms—have transformed India’s approach from reactive to preventive asset quality management. The journey from double-digit NPAs in the 1990s to sub-4% levels today demonstrate both the resilience and adaptability of the Indian financial system. Impact of NPAs on the Financial Health of Banks The growing burden of Non-Performing Assets (NPAs) has been one of the most persistent challenges affecting the financial health of Indian banks. The impact of NPAs extends far beyond mere accounting entries—it penetrates the core of banking stability by influencing profitability, liquidity, capital adequacy, and credit growth. This section examines in detail how rising NPAs affect the operational and financial efficiency of banks, particularly within the Indian context. In a banking system, assets are primarily loans and advances that generate income through interest. When these assets turn non-performing, they cease to earn interest, leading to a direct fall in income. The Return on Assets (ROA) and Return on Equity (ROE)—the two most crucial profitability indicators— decline sharply as NPAs increase. Empirical studies have confirmed a strong inverse relationship between NPAs and bank profitability in India [1]. When interest income drops and provisioning requirements rise, the overall net profit margin narrows, which subsequently reduces shareholder value and market confidence. Furthermore, NPAs impair liquidity management. Banks are required to maintain a certain level of liquid assets to meet withdrawal demands and regulatory requirements. However, when loans remain unpaid, the cash inflow from these assets stops, creating a mismatch between inflows and outflows. This compels banks to rely more on costly borrowings or the interbank market to meet liquidity needs, raising their overall cost of funds [2]. In extreme cases, liquidity stress may even lead to solvency concerns, especially for smaller or regionally concentrated banks. The impact of NPAs is also strongly visible in the capital adequacy position of banks. As per the Basel III framework, banks are mandated to maintain a Capital to Risk-Weighted Assets Ratio (CRAR) above 9%. When asset quality deteriorates, the risk-weighted assets increase while capital remains constant or declines, thereby eroding CRAR. Consequently, banks are forced to raise additional capital either through government recapitalisation (in the case of PSBs) or market borrowings, often at high costs [3]. Between 2017 and 2021, the Indian government infused more than ₹3 lakh crore into public sector banks to compensate for capital erosion due to high NPAs [4]. Another crucial dimension is provisioning and write-offs. Under RBI norms, banks must make provisions for doubtful or loss assets, which directly reduce operating profits. The higher the NPAs, the greater the provisioning requirement. In FY2018, provisioning for bad loans constituted over 40% of total operating expenses for several PSBs [5]. Though provisioning strengthens the balance sheet by recognising potential losses early, it simultaneously weakens short-term profitability. Moreover, large-scale write-offs—though they help in balance sheet cleansing—often invite criticism as they may appear to mask the true financial distress of banks. From a macroeconomic perspective, persistent NPAs lead to credit contraction. Banks become risk-averse, tightening lending norms and restricting credit availability to sectors perceived as risky, especially MSMEs and agriculture. This credit slowdown affects economic growth, investment cycles, and employment generation [6]. The problem is further aggravated when banks divert management resources from Int. Jr. of Contemp. Res. in Multi. PEER-REVIEWED JOURNAL Volume 4 Issue 6 [NovDec] Year 2025 317 © 2025 Madhvi. This is an open-access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY NC ND).https://creativecommons.org/licenses/by/4.0/ business expansion to recovery and litigation processes, thereby affecting operational efficiency and innovation. The investor and depositor confidence in the banking system also suffers during high-NPA phases. Market valuations of listed banks decline as investors perceive them to be financially unstable. This was evident during 2016–2018 when the NIFTY PSU Bank Index fell by nearly 35%, reflecting market concerns over stressed asset recognition [7]. Lower confidence can also trigger deposit migration from weak public banks to stronger private institutions, altering the competitive balance within the sector. Importantly, NPAs also distort inter-bank relationships and systemic risk. When one bank’s bad loans are linked to the liabilities of another through syndicated loans or guarantees, contagion effects emerge. This interconnectedness means that stress in one part of the system can quickly transmit to others. The RBI’s Financial Stability Report (2022) highlighted how the top 20 stressed accounts contributed to nearly one-third of total NPAs across the banking system, underscoring the concentration risk problem [8]. In recent years, however, sustained regulatory reforms and improved governance mechanisms have begun to mitigate the adverse impacts of NPAs. The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 significantly improved recovery rates and resolution timelines. According to the Insolvency and Bankruptcy Board of India (IBBI), banks recovered approximately ₹2.85 lakh crore through the IBC mechanism between 2017 and 2023 [9]. Similarly, enhanced provisioning norms, stricter audits, and the establishment of the National Asset Reconstruction Company Limited (NARCL) have improved transparency and asset resolution efficiency. Nevertheless, while recovery mechanisms have improved, the structural impact of NPAs continues to shape the risk culture of Indian banks. The emphasis has shifted toward preventive asset management—identifying potential defaulters early through data analytics, credit monitoring, and improved corporate governance. This shift marks a transformation from a reactive to a proactive stance in managing financial health. Policy and Institutional Reforms to Manage NPAs in India The persistent problem of Non-Performing Assets (NPAs) has prompted a series of structural, legislative, and regulatory reforms in India aimed at strengthening the banking system’s resilience and enhancing recovery mechanisms. Over the last three decades, successive governments and the Reserve Bank of India (RBI) have implemented multiple policy frameworks to contain, manage, and prevent the recurrence of high NPA levels. This section provides a detailed analysis of the evolution of these reforms, their implementation mechanisms, and their overall effectiveness in safeguarding the financial health of Indian banks. The earliest phase of NPA management reform began with the Narasimham Committee Reports (1991 and 1998), which recommended the introduction of prudential norms, income recognition standards, and capital adequacy requirements to align Indian banking practices with international standards. These reforms brought transparency to loan classification and compelled banks to maintain adequate provisioning against doubtful assets [1]. The committee also suggested the establishment of Asset Reconstruction Companies (ARCs) to manage and recover bad loans efficiently, leading to the eventual enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The SARFAESI Act (2002) was a landmark reform that empowered banks and financial institutions to recover their dues without court intervention by seizing and auctioning collateral assets. It gave rise to ARCs such as Asset Reconstruction Company (India) Limited (ARCIL) and Edelweiss ARC, which purchased stressed assets from banks at a discount and undertook resolution through restructuring or asset sale. Although SARFAESI improved recovery efficiency in the early 2000s, its impact later declined due to lengthy legal disputes and limited ARC capital capacity [2]. Recognising these limitations, the government introduced the Debt Recovery Tribunals (DRTs) under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, to expedite legal proceedings in loan default cases. However, the DRTs soon became overburdened, with over 100,000 pending cases by 2015 [3]. Consequently, there arose a pressing need for a more comprehensive and time-bound mechanism for resolving insolvency and bankruptcy cases. This led to the enactment of the Insolvency and Bankruptcy Code (IBC), 2016, which revolutionised the debt resolution framework in India. The IBC consolidated multiple existing laws and provided a unified mechanism for time-bound insolvency resolution within 180 to 330 days. Under IBC, if a corporate borrower defaulted, control was transferred to an independent resolution professional, ensuring creditor primacy and professional management. The introduction of the National Company Law Tribunal (NCLT) as the adjudicating authority further streamlined the process. By 2023, the IBC had facilitated recoveries worth over ₹2.8 lakh crore, with an average recovery rate of around 44%, significantly higher than pre-IBC mechanisms [4]. In parallel, the RBI introduced several regulatory and supervisory measures to improve early detection of stress. The Asset Quality Review (AQR) in 2015 was one such initiative that forced banks to recognise hidden NPAs and make adequate provisions. Additionally, the Prompt Corrective Action (PCA) Framework, introduced in 2002 and revised in 2017, imposed restrictions on weak banks in terms of lending, dividend distribution, and branch expansion based on financial health indicators such as CRAR, ROA, and NPA levels [5]. In recent years, the government has pursued a policy of consolidation and recapitalisation to strengthen public sector banks (PSBs). Between 2017 and 2021, 10 state-owned banks were merged into 4 larger entities to improve operational efficiency and capital adequacy. Simultaneously, the PSB Recapitalisation Program injected over ₹3 lakh crore to cover provisioning needs and restore lending capacity [6]. This was complemented by the introduction of governance reforms Int. Jr. of Contemp. Res. in Multi. PEER-REVIEWED JOURNAL Volume 4 Issue 6 [NovDec] Year 2025 318 © 2025 Madhvi. This is an open-access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY NC ND).https://creativecommons.org/licenses/by/4.0/ emphasising accountability, risk management, and transparency in board-level functioning. Another major institutional innovation has been the creation of the National Asset Reconstruction Company Limited (NARCL) in 2021—popularly known as the "bad bank"—to acquire large NPAs (above ₹500 crore) from banks and manage them for recovery through professional asset reconstruction. The government also set up the India Debt Resolution Company Limited (IDRCL) to assist in the valuation, management, and sale of such assets. This dual-structure model aims to clean up bank balance sheets while allowing them to focus on fresh lending [7]. To strengthen credit discipline and reduce future NPA generation, the RBI has also emphasised technological integration in risk assessment. The use of data analytics, AIdriven credit scoring, and real-time monitoring systems has helped identify early warning signals of default. Initiatives like the Central Repository of Information on Large Credits (CRILC) have enhanced information sharing among banks, reducing instances of multiple financing and willful defaults [8]. In the context of COVID-19, the RBI introduced the Resolution Framework for COVID-19 Related Stress (2020) and subsequent relief schemes for MSMEs to mitigate temporary liquidity shocks and prevent loan defaults from escalating into NPAs. While these measures ensured short-term stability, they also underscored the importance of dynamic and flexible regulatory responses to unforeseen economic disruptions [9]. Despite notable progress, challenges persist in the implementation of these reforms. Delays in judicial proceedings, limited capacity of NCLTs, and valuation discrepancies at ARCs and NARCL continue to hinder faster resolution. Moreover, the risk of “evergreening” of loans through repeated restructuring remains a concern. The RBI has, therefore, reinforced its supervisory vigilance by enhancing the role of Risk-Based Supervision (RBS) and mandating periodic stress testing for banks. 4. CONCLUSION The persistent challenge of Non-Performing Assets (NPAs) continues to stand as a defining issue in the financial health of Indian banks. Over the years, the evolution of NPAs has mirrored the broader transformation of India’s banking and economic landscape. What began as a concealed and unacknowledged weakness in the early 1990s has gradually been recognised as a systemic challenge requiring structural reform, technological modernisation, and ethical reorientation in banking practices. The journey of the Indian banking system in managing NPAs has been one of painful but progressive maturity. Initially, the focus was on recognition and disclosure, as seen in the postliberalisation years when prudential norms were first introduced. Over time, the emphasis shifted toward legal and institutional strengthening, with measures like the SARFAESI Act, Debt Recovery Tribunals, and later, the Insolvency and Bankruptcy Code. Each phase of reform brought incremental discipline, transparency, and accountability to the credit ecosystem. These efforts collectively reflect a shift from a culture of concealment to one of responsibility and corrective action. The impact of NPAs on the overall financial ecosystem is profound. Beyond balance-sheet implications, high NPAs erode profitability, reduce capital adequacy, weaken liquidity, and restrict credit flow to productive sectors. This, in turn, slows down investment and economic growth. Thus, NPAs are not merely a reflection of individual bank inefficiencies but a mirror of the broader economic and governance environment. Sustainable banking health is, therefore, inseparable from sound macroeconomic management, institutional integrity, and corporate accountability. While policy measures and regulatory vigilance have succeeded in bringing the NPA ratio down to a relatively stable level in recent years, emerging challenges remain. Post-pandemic restructuring, the rapid rise of retail and digital lending, and the potential spillover of global financial volatility could again test the resilience of Indian banks. Therefore, maintaining asset quality will require continuous innovation in risk management, adoption of advanced credit analytics, and reinforcement of ethical lending practices. Another critical area for sustained improvement lies in governance reforms—particularly in public sector banks, which continue to dominate India’s financial landscape. Reducing political interference, enhancing managerial autonomy, and promoting performance-linked accountability are essential to prevent the recurrence of large-scale NPAs. Moreover, collaboration between regulatory bodies, banks, and fintech institutions must be strengthened to ensure that the benefits of technological advancement translate into prudent, not reckless, credit expansion. In essence, the issue of NPAs in India underscores the importance of balance between growth and prudence, inclusion and accountability, innovation and regulation. A resilient banking sector is not merely the product of strong laws or better technology but of a culture grounded in financial discipline, transparent governance, and a long-term developmental vision. The lessons drawn from India’s NPA experience reaffirm that the health of a nation’s banking system is inseparable from the health of its economy and its governance ethos. REFERENCES 1. Reserve Bank of India. 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This license permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. About the corresponding author Madhvi is a faculty member in the Department of Commerce at I.B. (PG) College, Panipat, Haryana, India. She is actively engaged in teaching and academic activities, with research interests in accounting, finance, business management, and contemporary issues in commerce education.