B economists attribute the decline in bad loans in state-owned banks to the changes implemented by the Reserve Bank of India.
Over the past four years, the Indian economy has witnessed a significant reduction in non-performing assets (NPAs) in public sector banks (PSBs), thanks to a collaborative effort between the Reserve Bank of India (RBI) and the Indian government.
From 2021 to 2025, joint initiatives have focused on a multi-pronged approach, including regulatory reforms, capital infusion, technological modernization, and enhanced risk governance. These efforts have led to a cleaner loan book, reduced GNPA ratios, and a gradual recovery in PSB credit growth and profitability.
One key contribution has been capital infusion and balance sheet strengthening. The government injected capital into PSBs to improve their capital adequacy ratios, enabling banks to absorb losses from bad loans and provide fresh credit. By mid-2025, several PSBs showed improved capital adequacy, with Tier I capital ratios increasing, for example, to 13.68% for some banks.
Regulatory oversight and risk management have also played a crucial role. The RBI mandated stronger governance frameworks within PSBs, including establishing independent chief compliance officers and risk officers to monitor credit risk. This move improved accountability and lowered the incidence of fresh NPAs.
Asset quality improvement measures were another focus. Banks focused on recognizing and provisioning for bad loans promptly, which reduced hidden stress in balance sheets. Between June 2024 and June 2025, a consistent decline in GNPA and net NPA percentages was observed alongside improved provision coverage ratios (PCRs).
Technological modernization has been another driving force. The government and RBI promoted fintech adoption, digital banking, and technology investments in PSBs, which helped reduce lending costs, improve credit assessment, and widen outreach to retail, MSME, and agricultural segments less prone to default risks.
Bank consolidation and efficiency have also contributed to the reduction in NPAs. Continued consolidation and mergers among PSBs improved operational efficiencies and created banks with stronger capital bases and diversified loan portfolios, reducing overall sectoral NPAs.
The focus on priority sectors, such as retail, agriculture, and MSME, has also helped banks maintain healthier loan books.
The Insolvency and Bankruptcy Code (IBC), implemented by the NDA government, has played a crucial role in managing persistent defaulters and promoters. Economist Pankaj Jaiswal attributed the improvement in NPAs to this joint initiative of the RBI and the Centre. The total amount locked up in the gross NPAs of public sector banks has declined from Rs 6,16,616 crore in March 2021 to Rs 2,83,650 crore in March 2025.
Jaiswal highlighted the role of the IBC in addressing stressed assets and stopping the practice of evergreening. The RBI's introduction of the Asset Quality Review (AQR) was also considered crucial in preventing loans from being classified as NPAs. Banks now review a borrower's credit history and assess repayment capacity before approving loans, according to Jaiswal, strengthening both disbursal and monitoring systems.
The government's strategy for managing non-performing assets (NPAs) was clear and targeted, as noted by Jaiswal. The significant reduction in NPAs is considered a significant accomplishment for the central government, with the NPAs decreasing to 2.58% in 2025, as noted by Minister of State for Finance Pankaj Chaudhary.
In conclusion, the coordinated strategy involving regulatory reforms, capital support, governance enhancement, and technology adoption has led to significant progress in reducing NPAs in India's public sector banks over this period. While some challenges remain, the net impact from 2021 to 2025 has been a noteworthy strengthening of PSB asset quality and a reduction in gross NPAs.
In light of the strategic initiatives from 2021 to 2025, the focus on strengthening public sector banks (PSBs) in India has extended to both regulatory reforms and business aspects. For instance, the government's capital infusion has improved PSBs' capital adequacy ratios, while the RBI's regulatory oversight has enhanced risk management.
With the implementation of the Insolvency and Bankruptcy Code (IBC) and the Asset Quality Review (AQR), the financial sector has seen improvements in loan approval processes, credit assessment, and NPA management, thereby fostering a stronger business environment for PSBs.
