India’s banking system is getting healthier, thanks to strong recoveries, fewer new defaults, and cleaner loan books. However, small finance banks are seeing increased difficulty.
For any economy, the health of its banking system is a mirror of its financial discipline and growth potential. One of the clearest indicators of that health is the Non-Performing Asset, or NPA. In simple terms, NPAs are loans that borrowers stop repaying — either because their business fails, or they simply cannot meet their debt obligations. When banks are unable to recover these loans, they are classified as “bad loans”. High levels of NPAs mean banks have less money to lend, which hurts economic growth. It also affects depositors and investors because when banks lose money, they may reduce lending or increase interest rates to cover losses. So, when NPAs go down, it signals a stronger, more efficient banking system that supports the overall economy better. This makes discussions about NPAs not just important for bankers or economists, but for every citizen whose financial wellbeing depends on the stability of the banking sector.
The Reserve Bank of India’s latest report brings good news. Banks’ asset quality has kept getting better, with gross non-performing assets falling to a multi-decade low of 2.1% by the end of September 2025, from 2.2% at the end of March 2025. Simply put, only about ₹2.10 out of every ₹100 banks have lent is now labeled as bad loans. This is unusually good compared to past years when the ratio was much higher. The net NPA ratio, which shows bad loans after subtracting money banks set aside as a safety cushion, was 0.5% by September 2025, the same as in March 2025, showing that banks’ safety nets are holding steady even as stress decreases.
The RBI also noted that this isn’t just a one-time improvement; it’s part of a longer pattern. Bank asset quality has been steadily improving since 2018-19. In 2024-25, the gross NPA ratio for scheduled commercial banks fell to 2.2% at the end of March 2025 from 2.7% the year before. In terms of money, gross NPAs decreased to ₹4.32 lakh crore in 2024-25 compared to ₹4.81 lakh crore in 2023-24. The main takeaway is that the banking system has fewer unpaid loans than last year, and this improvement has continued into September 2025.
A closer look at different types of banks shows where the clean-up is strongest and where stress needs to be watched. Public sector banks, which used to have the most bad loans, saw their gross NPA ratio drop to 2.6% from 3.5%. This big improvement suggests they’re being more careful with lending and doing a better job of recovering money. Private sector banks edged down to 1.8% from 1.9%, while foreign banks improved to 0.9% from 1.2%. Small finance banks are the exception, with their asset quality getting worse as the gross NPA ratio rose to 3.6% from 2.4%. This difference is important because it suggests that stress isn’t spread evenly; some lenders that focus on small borrowers may be having trouble getting paid back.
So, what’s causing the drop in bad loans? Are borrowers more honest, or are banks better at dealing with stress? The RBI’s numbers suggest it’s recoveries and upgrades that have made the biggest difference. About 42.8% of the decrease in GNPAs in 2024-25 came from better recoveries and upgrades of stressed accounts. Banks recovered ₹67,693 crore from bad loans and upgraded ₹50,087 crore worth of stressed accounts. This means some borrowers who were struggling started paying again, and their loans moved back to healthier categories. It’s like seeing late payments start coming in, and the bank updating the account because the borrower’s finances got better.
Another key number is the slippage ratio, which tracks new additions to NPAs – how many new bad loans appeared during the year compared to the total loans at the start. This ratio has fallen for five years in a row to 1.4% at the end of March 2025 and decreased to 1.3% by September 2025. This is a good sign because a clean-up is most believable when fewer new loans are turning bad, not just when old bad loans are being written off or settled. The RBI noted that slippages fell for both public and private banks, though they remained higher for private sector banks, suggesting that new stress still needs to be watched in some areas.
The improving situation also shows up in the percentage of standard assets – loans that are being repaid on time. For scheduled commercial banks, standard assets rose to 97.7% of total loans at the end of March 2025 from 97.2% the year before, helped by improvements in public sector and foreign banks. The report also noted that large borrower accounts (those with loans of ₹5 crore and above) made up about 43.9% of total bank loans, suggesting the system’s risk hasn’t changed much.
Finally, the RBI’s comments on Special Mention Accounts offer an early warning sign that’s easy to understand. These are accounts that aren’t yet NPAs but show signs of difficulty – like a bill that’s a little late but not seriously overdue. SMA-0, SMA-2, and NPAs decreased as a percentage of total loans for both overall and large borrower accounts, but SMA-1 increased in 2024-25, driven by a rise in SMA-1 for public sector banks. Since SMA-1 means payments are 31 to 60 days late, this increase reminds us that even when things are generally good, some borrowers are still struggling and need timely attention before things get worse. Restructured standard loans also decreased, mainly due to public sector banks, while private banks continued to have fewer restructured standard loans than public sector banks, reflecting differences in their loan portfolios and past clean-up efforts.
