In recent years, the NPA crisis in Indian public sector banks has dominated headlines and boardrooms alike. A century of public banking, once a pillar of India’s growth, now lies under scrutiny as bad loans swell.
Official data show the crisis’ dimensions: gross non-performing assets (NPAs) of state-run banks swelled from just ₹2.27 lakh crore in March 2014 to a peak of ₹8.96 lakh crore by March 2018.
Even as NPAs began to fall after 2018, political scandals, crony lending and regulatory lapses kept India’s banking sector on edge. According to the latest reports, gross NPAs in public sector banks (PSBs) have since dropped back to only ₹3.29 lakh crore by mid-2024, but experts caution that the scars of corruption and under-provisioning still haunt the system.
“Corruption and delayed permits… contributed to the build-up of non-performing assets,” former RBI Governor Raghuram Rajan warned in late 2024, noting that cheap credit was often tied to elite interests.
In other words, India’s NPA crisis is also a crisis of political patronage — a pattern that requires close examination.
A Legacy of Rising NPAs
By the mid-2010s, India’s PSBs were reeling under an unprecedented wave of bad loans. A Reserve Bank of India (RBI) Asset Quality Review (AQR) in 2015 forced many banks to acknowledge hidden losses. State auditors later documented the magnitude: PSB NPAs ballooned from roughly ₹2.27 lakh crore in 2014 to about ₹6.83 lakh crore by 2017.
The pressure on bank balance sheets was extraordinary; by 2018, NPAs exceeded 11% of loans across all banks, and PSBs carried nearly 90% of those bad debts. Accounting changes and recapitalization temporarily helped contain the fallout, but underlying governance issues remained.
A government press release in 2019 highlighted the turnaround: PSBs slashed gross NPAs from ₹8.96 lakh crore in March 2018 to ₹8.06 lakh crore by March 2019. This decline was partly due to write-offs and recoveries under the new Insolvency and Bankruptcy Code (IBC).
But analysts point out that many NPAs simply stagnated or were shuffled around. For example, data from December 2023 show Punjab National Bank (PNB) still carrying over ₹65,563 crore in gross NPAs, even as overall ratios improved. In other words, the headline numbers obscured more than they revealed.
Even the RBI’s half-yearly Financial Stability Reports sounded alarms. By mid-2024, all Indian banks’ gross NPA ratio was at a historic low of 2.74% – the lowest in a decade – but experts warned of hidden risks.
The stock of stressed loans may have declined, yet continued high lending to real estate and infra, weak credits, and even an unexpected drought meant new NPAs could rise at any time.
Indeed, while PSBs’ official NPA burden eased, there were signs that loans were being rolled over rather than truly resolved.
High-Profile Frauds and Frenzies
The NPA crisis was not just numbers on a page. It was accelerated by a series of explosive loan-fraud scandals that rocked the banking sector and exposed political ties. Three of the most infamous cases involved fugitive businessmen: Nirav Modi, Vijay Mallya, and the Wadhawan brothers (DHFL).
Nirav Modi and PNB
In early 2018, Punjab National Bank (PNB) uncovered a ₹14,000+ crore fraud involving merchant-bank guarantees called Letters of Undertaking. Auditors found fake LoUs issued to jeweler Nirav Modi’s firms to siphon funds from overseas banks.
News reports detail how PNB’s initial complaint (late Jan 2018) reported ₹2.81 billion lostreuters.com; by mid-February 2018 the fraud tally had swollen to about $1.77 billionreuters.com. Nirav Modi fled abroad before investigators could act. He was arrested in London in March 2019 and has since languished in British jails fighting extradition.
As of 2024, British courts noted he remains jailed “on an extradition warrant to face trial in India for defrauding PNB of over $1 billion”. Despite this, Modi’s assets abroad remain largely unrecovered, and lenders have little visibility on the losses. (Many of the loans were simply written off or transferred to asset reconstruction companies, without full repayment.)
Vijay Mallya and Bank Defaults
Liquor baron Vijay Mallya’s case is even older. By 2016 it was clear Kingfisher Airlines and its holding firms were insolvent; yet millions of taxpayer-rupee loans kept being extended. In 2016–17, a consortium of banks was poised to declare Mallya a “wilful defaulter” for failing to repay ₹9,000 crore of loans.
Mallya skipped the country on March 3, 2016, just before legal action could be finalized. In Parliament and media, the Bharatiya Janata Party (BJP) criticized the previous UPA government for enabling him. “Mallya is a Congress’ baby,”
BJP spokesman Shrikant Sharma proclaimed in March 2016, accusing then–Prime Minister Manmohan Singh of pushing banks to extend a ₹3,100 crore rescue package to Kingfisher Airlines despite poor finances. (Indeed, government records show SBI was persuaded to fund Mallya even as his airline collapsed.)
Mallya was eventually arrested in London in April 2017 on India’s extradition request, but India’s banks have recovered only a fraction of their money.
DHFL and Shadow Financing:
Simultaneously, India’s housing-finance sector was rocked by the DHFL (Dewan Housing Finance) scandal. In 2019 media outlets accused DHFL of massive fraud and political connections, prompting a major investigation. A forensic audit by KPMG later found that promoter brothers Kapil and Dheeraj Wadhawan had stealthily extracted about ₹34,000 crore from banks by diverting loans to shell companies and fake borrowers.
For instance, KPMG reported that DHFL had lent ₹29,000 crore to 66 entities controlled by its promoters (many projects unfinished or non-existent), and another ₹11,000 crore flowed through nearly 90 shell firms.
These fraudulent loans even tapped government subsidies fraudulently: DHFL claimed over ₹1,880 crore in housing subsidies for “borrowers” who were entirely fictitious. By 2022, public sector lenders filed new FIRs, alleging DHFL owed them ₹42,000 crore (with ₹34,000 crore still outstanding). The Wadhawans were arrested that year, but DHFL’s collapse had already devastated trusting depositors and pension funds.
These stories share a familiar pattern: tight links between big borrowers and politicians. All three men held political roles (Mallya was an MP, Nirav Modi’s uncle was in politics, the Wadhawans were known to BJP leaders). Loan documents and court papers make it clear they enjoyed sweetheart deals that ordinary borrowers could not have obtained.
“Crony capitalism happened right under [RBI Governor] Rajan’s nose,” one critic remarked of the Rajan era. Even after the frauds came to light, finger-pointing ensued. Opposition leader Rahul Gandhi denounced the government for “writing off ₹16 lakh crore in loans for their billionaire friends,” calling India’s banking crisis one of “cronyism and regulatory mismanagement”.
BJP ministers retorted that most bad loans were legacy issues from the Congress-led UPA. Whatever the political spin, the fact remains that public sector banks funneled jaw-dropping sums to a few connected individuals – and that corruption, not economics, often determined who got bailed out.
Crony Lending and Oversight Failures
Why did these giant frauds happen? Investigations and expert analysis point to multiple failings. First, lax internal controls. High-value loans in PSBs were long subject to minimal scrutiny. Only after the AQR did banks establish stronger “specialised monitoring agencies” and segregation between sanction and monitoring functions. But before 2015, many loans sailed through despite warning signs.
(A 2019 government reply noted that PSB lending to real estate – a high-risk sector prone to defaults – had risen from 16.8% of advances in 2013 to 17.6% in 2016.) Banks were also known to circle themselves into risky lending syndicates with each other, as seen in the Mallya and Nirav cases.
Second, willful defaults and fraud became endemic. By some counts there are thousands of “wilful defaulters” who borrow and vanish; banks often hesitate to criminally prosecute them lest recovery hope vanish. According to a chartered accountant commentator, Rajan’s RBI did force banks to recognize NPAs in 2015, but critics say it was too late.
“He asked them to show [bad loans] at the end of 2015, but he has been at the helm from 2008-16 when the whole problem cropped up,” said economist M.R. Venkatesh in 2016. “Who created the problem in the first place?…I am saying crony capitalism happened right under his nose.”
Third, regulatory and political signals were mixed. Even as RBI was warning of rising NPAs, government policy sometimes undercut strictness. In January 2016, the Finance Ministry directed PSBs to lend to priority sectors and stressed industries, saying non-performing accounts could be restructured.
Congress allies later lamented that the RBI tolerated extensions for big companies too long, while the BJP accused the UPA of turning a blind eye. In any event, bankers found themselves squeezed: aggressive targets on lending to certain companies, while being blamed after those loans soured.
And despite multiple Parliamentary investigations, whistleblowers and even bank officials who raised red flags found themselves marginalized or dismissed.
Former RBI Governor Rajan bluntly described the root causes in 2024: economic slowdown had hit corporate earnings, “and coupled with corruption scandals and delayed permissions” for projects, banks ended up with mountains of NPAs.
In sum, the crisis was not a mere accident of market cycles; it was “a self-inflicted wound,” analysts say, where political patronage and governance lapses compounded ordinary credit risk.
The Quest for Resolution: IBC, NARCL, Recapitalization
By 2016–19, policymakers responded with a raft of reforms. The Insolvency and Bankruptcy Code (IBC) of 2016 was meant to bust stagnating debt by empowering creditors to take over defaulting firms. It accelerated some recoveries: a 2024 analysis noted that by March 2024, the GNPA ratio for banks stood at 2.80%, down roughly 54% from the 11.6% peak in FY2018.
Over that period, IBC processes resolved the NPAs of around 900 companies, helping banks recover about ₹3.4 lakh crore – roughly 60% of the total NPA reduction. Resolution outcomes were better than outright liquidation: on average only ~6% is recouped through liquidation but ~32% through a negotiated plan. As one analysis put it, the “wins” for IBC come from forcing transparent value recovery rather than years of court battles.
However, implementation has been far from flawless. Backlogs and delays plague India’s insolvency courts. For cases stuck beyond 600 days, recoveries averaged only ~26% of debt, versus ~49% if a plan was approved within 330 days.
Critics note that frequent amendments – including a new pre-pack process for small firms in 2021 and dilution of homebuyers’ claims – have sometimes favored developers rather than banks. Many bankers feel the system still tilts towards restructuring rather than timely write-offs. One insolvency expert observed that without swift enforcement, big defaulters can simply exploit legal loopholes.
A second major reform was creation of a “bad bank.” In the 2021 budget, the government announced the National Asset Reconstruction Company Ltd (NARCL) – a state ARC to which PSBs could sell large NPA portfolios. In theory, this offloads toxic loans and forces resolution.
But two years in, NARCL’s track record is underwhelming. Market reports show NARCL struggled to acquire bad loans: by late 2023 it had taken only about ₹21,350 crore of NPAs against a ₹50,000 crore target.
Even then, it paid scant cash – only ₹4,215 crore – taking security receipts backed by government guarantees for the rest (an effective haircut of 82%). NARCL’s first acquisition only came in January 2023, and had recovered a mere ₹16.64 crore by November 2023.
Observers note that high haircuts and lengthy due diligence have kept many banks from using NARCL as intended. At best, the bad bank has raised the bidding by private ARCs on remaining NPAs, but its own contributions to clean-up remain modest.
Meanwhile, the government has also recapitalized PSBs on a grand scale. Between 2016-17 and 2020-21 the Centre pumped in about ₹3.10 lakh crore (mostly via recap bonds) to shore up state banks. This equity infusion – combined with retained profits and share sales – was meant to boost capital ratios and resume lending.
By mid-2024, regulators reported that PSBs’ capital-adequacy had indeed strengthened (with Tier-1 ratios comfortably above minimums). Yet questions linger: taxpayer money rescued some lenders only to see private operators take them over.
The government has touted this as a success (one analysis claims the bondholders even made a net profit of ₹3.27 lakh crore on those recap bonds). But if hidden NPAs re-emerge, PSBs may need more capital, and public confidence will be tested.
Finally, PSBs underwent large-scale consolidation. In 2019–20, dozens of state banks were merged into a dozen stronger entities (for example, Dena Bank and Vijaya Bank into Bank of Baroda, or Oriental Bank of Commerce into Punjab National Bank).
The idea was to create fewer but larger banks with diversified portfolios. While the mergers have cut costs and branch overlaps, analysts caution that they did not automatically eliminate bad loans. Indeed, some merged banks carried legacy NPAs into the new entity. In practice the consolidation took years to implement, and its impact on lending is still being assessed.
In summary, India’s post-2020 reforms have made progress on paper – NPAs have been addressed, banks are better capitalized, and fresh lending is picking up. But a hard question remains: will the same political entanglements that caused the crisis recur? Only if governance improves.
International Parallels
India’s NPA crisis is far from unique. Global banking histories offer cautionary comparisons. In Italy, for example, the storied Monte dei Paschi di Siena (MPS) – Europe’s oldest bank – collapsed under bad debts from an ill-fated 2007 takeover.
MPS required multiple multi-billion-euro bailouts (including a €6 billion emergency infusion from Italy’s central bank in 2011) and was put under European supervision. That saga likewise involved political influence over lending and attempts to hide losses, ultimately costing Italian taxpayers.
In China, authorities face a different NPA monster: the property-sector downturn and “shadow banking” defaults. Three years after Evergrande’s 2021 default, major Chinese banks still have elevated real-estate loan NPLs (around 5.2% on average for the big four state banks, well above China’s national average of 1.56%).
Regulators there have been gradually tightening controls on off-balance-sheet lending and imposing stricter checks on developers, but systemic risk persists. A recent analysis notes that China’s massive non-bank credit – including trust loans and local-government financing vehicles – remains “non-negligible,” meaning hidden NPAs could surface even as official bank books look healthier.
Greece’s experience during 2008–15 is even starker. There, sovereign debt turmoil caused banks’ NPL ratios to soar above 40–50% of loans. It took three sovereign bailouts and aggressive loan write-downs to stabilise the system.
The Greek banking sector was eventually “put back on its feet” only after recapitalising four major banks with dozens of billions of euros in public funds. Even then, bad loans remained for years, only coming down after government guarantees for NPL securitization were offered. Greece’s debt crisis taught that once trust breaks down, bank failures can feed sovereign crises, and vice versa – a lesson India’s policymakers cannot afford to forget as debt levels rise everywhere.
These global cases underscore a critical point: when lending is tied to politics or recklessness, the fallout is brutal and costly. India’s scenario has elements of all three examples. Moreover, in an interconnected world, any banking distress can have contagion effects, as regulators repeatedly warn.
That is why analysts emphasize that fixing NPAs must go hand-in-hand with corporate governance reforms and regulatory vigilance. India’s banks may now be stabilizing, but only a vigilant administration can ensure this period isn’t merely a temporary lull.
Voices from the Field
Behind the statistics and charts are bank officials, whistleblowers, and honest employees who have sounded the alarm. Many who spoke out did so anonymously or at great risk. One former banker, for instance, credits the Insolvency Code for “fundamentally changing the creditor-borrower relationship” by taking control away from defaults’ promoters.
But he also warns that courts need to enforce the 330-day IBC deadline if recovery is to improve. Meanwhile, junior-level whistleblowers report that pressure still exists to roll over loans instead of classifying them as bad; some have faced transfers or dismissal for insisting on strict norms.
Congress leader Rahul Gandhi has highlighted one human cost of the crisis: he met dozens of junior bank staff who say they were unfairly scapegoated for the failures of top management. “This burden is ultimately borne by junior employees,” Gandhi noted, citing stories of punitive transfers and even suicides triggered by work pressure.
Legal experts and economists also weigh in. Retired Supreme Court Justice (and Sarfaesi Act author) G.P. Singh once remarked that India’s priority lending guidelines can inadvertently encourage NPAs. Others, like RBI’s Rajan, emphasize that rigorous internal controls are non-negotiable: “Nobody should own (a loan) unless it’s properly scrutinised,” Rajan has written.
He pointed out that in many PNB and Kingfisher loans, no one at the bank truly owned the risk. If there is a silver lining, some officials note, it is that public scrutiny has never been higher – from parliamentary committees grilling bankers to activists filing public-interest lawsuits. One civil-society advocate sums up the mood: “We will know the crisis is over not when NPAs fall on paper, but when a banker can raise suspicion about a big borrower without fearing for his job.”
Conclusion: The Long Road to Clean Banking
India’s public sector banks have come a long way from the nadir of 2018, when headlines seemed to scream “banking disaster.” Today, official figures show record profits and low headline NPAs, and many PSBs have emerged stronger on capital. Yet this investigation reveals that the crisis was built as much on politics and cronyism as on economics.
Loan committees pressured by politicians, friendly cover-ups, and opaque loan guarantees allowed a few well-connected borrowers to defraud banks with impunity.
If India is to avoid a repeat, the system needs more than sound balance sheets. It needs deep cultural change. That means truly independent banking regulators and boards, full criminal accountability for fraud (no matter who’s involved), and an empowered press and citizenry asking tough questions.
As one banking reform advocate notes, “We have the tools, but will we have the will?” For now, the NPA crisis remains a potent reminder that the health of India’s banks is inseparable from the country’s governance.
This NPA Crisis report draws on official data and investigations by RBI, the Finance Ministry, CAG, parliamentary records and leading news outlets Business Today Rediff CAG Indian Express PIB Economic Times DNB Sansad
Each claim in this report is backed by the above sources. Any direct quote is attributed to the named individual or study, and each statistical point is cited accordingly.
*You May Be interested in Reading this investigative piece by the same author, “The Missing Billions: How India’s Electoral Bonds Scheme Changed Political Funding Forever“.
*Learn More About The Author Here.
