The NPA crisis: twin balance sheets, evergreening and the clean-up

Detail

Key terms and formulas

• Non-Performing Asset (NPA): a loan whose interest or instalment has not been paid for more than 90 days. The bank has stopped earning income from it.
• Gross NPA (GNPA): the total value of all bad loans, before the bank sets aside any money to cover them.
• Provision: money a bank keeps aside from its profits to cover a likely loss on a bad loan.
• Net NPA (NNPA): the bad loans that are left after taking away the provisions.
• Formulas:
• GNPA ratio = (Gross NPAs ÷ Gross Advances) × 100
• NNPA = Gross NPAs − Provisions
• NNPA ratio = (Net NPAs ÷ Net Advances) × 100, where Net Advances = Gross Advances − Provisions

• Provision Coverage Ratio (PCR) = (Provisions ÷ Gross NPAs) × 100

• Worked example:

• A bank has given loans of Rs 1,000 crore. Of this, Rs 100 crore is NPA, and it has set aside Rs 70 crore as provisions.
• GNPA ratio = 100 ÷ 1,000 × 100 = 10%
• NNPA = 100 − 70 = Rs 30 crore
• NNPA ratio = 30 ÷ (1,000 − 70) × 100 = about 3.2%

• PCR = 70 ÷ 100 × 100 = 70%

• Capital to Risk-weighted Assets Ratio (CRAR): the bank's own capital divided by its risk-weighted assets. Risk-weighted assets are the loans and investments adjusted for how risky they are. Basel norms set a minimum CRAR. A higher CRAR means the bank can absorb more losses.

Genesis: the 2004-2011 credit boom

• Banks lent heavily to infrastructure, power, steel and telecom during 2004-2011.
• Much of this lending went to PPP projects. PPP (public-private partnership) means the government and a private company build and run a project together.

• The projects were long and expensive, and banks expected high growth to continue.

• Shocks that followed:

• Land-acquisition and environmental-clearance delays: projects got stuck, costs went up, and no revenue came in.
• Cancellation of 2G spectrum licences (2012) and coal blocks (2014) by the Supreme Court. Telecom and power companies lost the assets their loans were based on.

• Global commodity-price crash: prices of steel and other metals fell, so steel companies earned less and could not repay.

• Result: loans that looked healthy on paper could no longer be repaid.

The twin balance sheet (TBS) problem

• Definition: over-leveraged companies (companies with too much debt) and stressed banks (banks with too many bad loans) at the same time. The term comes from the Economic Survey 2016-17.
• Chain of effects:
• Companies carried heavy debt → they could not invest.
• Banks carried bad loans and low capital → they would not lend.

• Less investment and less credit → investment and credit growth stalled → GDP growth slowed.

• Proposed fix: PARA (Public Sector Asset Rehabilitation Agency).

• This is a type of "bad bank" (an agency that buys bad loans from banks).
• It would take over the largest bad loans and take the hard decisions, such as reducing the debt, that bankers feared to take on their own.

How the stress was hidden

• Regulatory forbearance: the regulator relaxes its own rules for a while.
• Restructured loans could be counted as standard assets (healthy loans) until April 2015.

• So banks did not have to set aside provisions for them, and reported profits looked better than they really were.

• Evergreening: a bank gives a fresh loan to a struggling borrower so that the borrower can repay its old dues.

• The old loan then looks "repaid", and the account never turns NPA.

• This hides the true size of bad loans.

• Loan restructuring: the bank changes the loan's tenure, interest rate or repayment schedule so that the borrower does not default.

• Failed restructuring schemes, one after another:

Scheme	What it did
CDR (Corporate Debt Restructuring), 2001	Lenders together restructured large loans
JLF (Joint Lenders' Forum)	Lenders had to form a group as soon as early signs of stress appeared
5/25 scheme	Infrastructure loans could be stretched over 25 years, with the terms reset every 5 years
SDR (Strategic Debt Restructuring)	Lenders could turn their loans into shares and take control of the company
S4A (Scheme for Sustainable Structuring of Stressed Assets)	The loan was split into a repayable part and a part turned into equity

• These schemes ran up to 2014-16. Most of them only delayed the recognition of bad loans. They did not solve the problem.

Recognition: the Asset Quality Review (AQR)

• AQR, 2015-16, under Governor Raghuram Rajan: RBI inspected whether banks were classifying and provisioning bad loans correctly.
• It exposed the hidden NPAs, so reported GNPA jumped.
• PSB GNPA ratio: 4.97% (March 2015) → peak of 14.58% (March 2018) [3].

The 12 February 2018 circular

• It replaced all the older schemes (CDR, SDR, S4A, 5/25, JLF).
• One day of default was enough to trigger action by lenders.
• For large accounts, a resolution plan had to be put in place within 180 days. Otherwise the loan had to be taken to the IBC (Insolvency and Bankruptcy Code, 2016, the law that sets a time-bound process for dealing with companies that cannot pay their debts).
• The Supreme Court struck it down in Dharani Sugars (April 2019). The Court held that RBI had gone beyond its powers under the Banking Regulation Act.

Prudential Framework (7 June 2019)

• Lenders get a 30-day review period after a default to decide how to resolve the account.
• An inter-creditor agreement (ICA) binds all the lenders to one resolution plan.
• Banks must make additional provisions if resolution is delayed. This pushes them to act on time, but it is not a forced move to IBC.

COVID period

• A loan moratorium let borrowers delay repayments for a time.
• Resolution Frameworks 1.0 (2020) and 2.0 (2021) allowed a one-time restructuring of COVID-hit loans without marking them NPA.

The clean-up: the 4R strategy

• Since 2015, the government has followed the 4R strategy [3]: 1. Recognition: show NPAs transparently. 2. Resolution and Recovery: through the IBC and other channels. 3. Recapitalisation: put fresh capital into PSBs. 4. Reform: change governance and lending practices.

• EASE reform index (Enhanced Access and Service Excellence): a scorecard that tracks how well PSBs carry out these reforms.

Recapitalisation

• Bank recapitalisation means putting fresh capital into banks, mainly PSBs, so that they meet capital norms (CRAR).
• October 2017 package: Rs 2.11 lakh crore, of which Rs 1.35 lakh crore came through non-tradable recapitalisation bonds.
• How it worked: the government gave the bonds to the banks → the banks paid the government cash for the bonds → the government put the same money back into the banks as equity.

• Debate: the cost did not show up in the headline fiscal deficit (the gap between what the government spends and what it earns, excluding borrowings). Only the yearly interest on the bonds hit the budget.

• Total recapitalisation: Rs 3.12 lakh crore over four financial years [3] (NCERT: about Rs 3.1 lakh crore, FY17-FY21).

• Rs 2.46 lakh crore came from the government.

• Over Rs 0.66 lakh crore was raised by PSBs themselves from the market [3].

• PSB CRAR: 11.45% (March 2015) → 15.43% (September 2024), a rise of 393 basis points [3].

Results of the clean-up

• PSB profits:
• Net profit of Rs 1.41 lakh crore in FY 2023-24 [5].
• Highest-ever net profit of Rs 1.78 lakh crore in FY 2024-25 [4].

• Net profit of Rs 0.94 lakh crore in H1 FY 2025-26 [4].

• Dividends paid by PSBs: Rs 34,990 crore in FY 2024-25, of which the government's share was Rs 22,699 crore (FY 2023-24: Rs 27,830 crore) [4].

• PSB asset quality:
• GNPA ratio 3.12% (September 2024) [3] → 2.30% (September 2025) [4].

• NNPA 3.92% (March 2015) → 0.45% (September 2025) [4].

• All scheduled commercial banks (SCBs):

• GNPA ratio 2.3% (March 2025), a multi-decadal low [2].
• PSB GNPA 3.7% (March 2024) → 2.8% (March 2025). Private banks 2.8%. Foreign banks 0.9% (from 1.2%) [2].

Write-off vs waiver

Loan write-off	Waiver
A fully provided loan is removed from the balance sheet	The debt is legally cancelled
The borrower still owes, and recovery continues	The borrower owes nothing
Technical write-off (kept at branch level) vs prudential write-off	Farm-loan waivers: see financial-inclusion-rural-credit

• Technical write-off: the NPA stays outstanding in the borrower's loan account but is written off, fully or partly, only for accounting purposes. No claim against the borrower is given up [6].
• Worked example:
• A Rs 50 crore NPA is fully provided and then written off. The bank's balance sheet no longer shows it, so the GNPA ratio falls.

• The borrower still owes Rs 50 crore, and the bank can still recover it through the courts, DRTs (Debt Recovery Tribunals) or IBC.

• There have been large cumulative write-offs over the past decade (verify current figure).

• Exam trap: a fall in GNPA can come from write-offs, not only from recovery.

One-time settlement (OTS) / compromise settlement

• OTS: the lender accepts a smaller lump sum in full settlement of the loan.
• RBI circular of 8 June 2023, "Framework for Compromise Settlements and Technical Write-offs" [6]:
• Compromise settlement: a negotiated deal with the borrower to settle the lender's claim in full. The lender may give up part of the amount due [6].
• Lenders must have a board-approved policy for such settlements [6].
• It also covers wilful-defaulter and fraud accounts. Criminal cases against these borrowers continue [6].
• Settlement with a wilful defaulter needs board approval in every case [6].
• Cooling-off period: at least 12 months after a settlement or technical write-off before the borrower can get fresh credit. Farm loans are excluded [6].

Wilful defaulter

• Definition: a borrower who has the capacity to pay but does not pay, or who diverts funds (uses the loan for a purpose other than the one it was given for), or who sells pledged assets (assets given as security for the loan) without the lender's knowledge.
• Master Direction 2024: applies to dues of Rs 25 lakh and above.
• Penalties:
• No additional credit from any lender.
• Barred from floating new ventures.
• Barred from the boards of other companies.

Prelims Hooks

• Twin balance sheet problem: coined in the Economic Survey 2016-17. The proposed fix was PARA (Public Sector Asset Rehabilitation Agency).
• Formulas: NNPA = GNPA − provisions. PCR = provisions ÷ GNPA × 100.
• Regulatory forbearance on restructured loans (counting them as standard assets) ended in April 2015.
• Order of schemes: CDR (2001) → JLF / 5/25 / SDR / S4A (2014-16) → 12 Feb 2018 circular (1-day default, 180 days) → Prudential Framework (7 June 2019: 30-day review period, ICA).
• Dharani Sugars (April 2019): the Supreme Court struck down the 12 February 2018 circular.
• PSB GNPA peak: 14.58% in March 2018 [3]. SCB GNPA: 2.3% in March 2025 [2].
• 4R = Recognition, Resolution, Recapitalisation, Reform. It has been followed since 2015 [3].
• Trap: a write-off does NOT cancel the debt. The borrower still owes it. A waiver cancels it.
• Compromise-settlement framework (8 June 2023): allows settlement with wilful defaulters and fraud accounts, with a 12-month cooling-off period (farm loans excluded) [6].
• Wilful-defaulter rules (Master Direction 2024): apply to dues of Rs 25 lakh and above.

Mains Points

• Why the crisis happened: poor lending during the boom, project stalls caused by policy and courts, and a commodity crash.
• Forbearance and evergreening then hid the problem for years.

• Delay in recognising bad loans raised the final cost. The AQR worked because it forced honest accounting first.

• Recapitalisation bonds, the trade-off: they saved PSBs without a spike in the headline fiscal deficit.

• But they reduced fiscal transparency.

• They also raise a moral hazard question: if the state keeps bailing out PSBs, banks may keep lending carelessly. Governance reform (EASE, the 4R strategy) is needed alongside capital.

• Write-offs and compromise settlements: they clean balance sheets and free up capital.

• Critics say that letting wilful defaulters settle (June 2023) may reward bad behaviour. Supporters say it gives faster recovery than long court cases.

• A balanced answer should point out that criminal cases continue and that board approval is required [6].

• Link to growth: fixing the twin balance sheets restored banks' ability to lend.

• The record PSB profit of Rs 1.78 lakh crore in FY 2024-25 [4] and a 2.3% GNPA ratio in March 2025 [2] support the revival of private investment.
• Early stress detection and a working IBC are needed so that the problem does not return.