Bad loans: NPAs, recovery and the Insolvency and Bankruptcy Code

A non-performing asset, or NPA, is a loan on which interest or principal has remained overdue beyond a specified period, generally 90 days for most bank loans in India. When loans turn bad, banks must set aside provisions from profits, which reduces their ability to lend, and large NPAs can erode capital and confidence. Because banks lend depositors' money, a bad-loan crisis is not only a banking problem: it can tighten credit for healthy firms, burden the budget if public banks need recapitalisation, and slow growth.

India's NPA problem grew visibly in the 2010s, concentrated in infrastructure, steel, power and other large corporate exposures, alongside agricultural and small-business stress in some periods. Causes debated by analysts include aggressive lending during booms, project delays from land, environmental and regulatory clearances, weak appraisal and monitoring, evergreening of troubled loans, and economic slowdowns that hit cash flows. Public sector banks were more affected than private banks, which raised questions about governance, political pressure and the quality of credit appraisal in state-owned banks.

Recovery historically relied on debt recovery tribunals, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, known as SARFAESI, and negotiated settlements, but recovery was often slow and uncertain. The Insolvency and Bankruptcy Code, 2016, created a time-bound process: creditors can take a defaulting company to the National Company Law Tribunal, a resolution professional manages the firm, and creditors vote on a resolution plan or the firm goes into liquidation. The Code shifted power towards creditors and aimed to resolve stress quickly rather than leave firms as zombie borrowers.

Outcomes remain debated. The Code has improved recovery compared with earlier routes in many large cases, but delays, litigation, haircuts for creditors and uneven treatment of operational creditors and workers have drawn criticism. Asset reconstruction companies and the bad bank, the National Asset Reconstruction Company, also buy stressed assets to clean balance sheets. For civil studies, the lesson is that credit discipline depends on institutions: clear default rules, quick resolution, honest classification of bad loans and accountability for lending decisions matter more than periodic bailouts alone.