1. Improving Asset Quality of Indian Banks: Recent Trends
The Indian banking sector has witnessed a sustained improvement in asset quality over recent years, reflected in a sharp decline in stressed assets. By March 2025, the Gross Non-Performing Asset (GNPA) ratio fell to 2.2%, a multidecade low, down from 2.7% in March 2024, indicating healthier balance sheets and improved credit discipline.
This trend continued into FY26, with GNPA further easing to 2.1% by September 2025. Simultaneously, the Net NPA (NNPA) ratio declined to 0.5%, supported by aggressive provisioning by banks. Lower NNPA reflects stronger shock-absorption capacity and reduced systemic risk.
A critical driver of this improvement has been recoveries and upgrades. During FY25, 42.8% of the reduction in GNPAs was attributable to these factors, underscoring the role of institutional recovery mechanisms rather than mere write-offs.
If such improvements were absent, banks would face capital erosion, constrained lending capacity, and weaker monetary transmission, adversely affecting economic growth.
The sustained fall in GNPA and NNPA ratios signals that institutional reforms, provisioning discipline, and recovery mechanisms are reinforcing financial stability; ignoring this momentum risks reversal into a credit stress cycle.
Key statistics:
- GNPA: 2.2% (Mar 2025) → 2.1% (Sep 2025)
- NNPA: 0.5% (Mar & Sep 2025)
- Contribution of recoveries/upgrades to GNPA reduction: 42.8% (FY25)
2. Declining Slippages and Credit Discipline
Alongside lower NPAs, the slippage ratio—fresh NPAs as a share of standard advances—has declined for the fifth consecutive year, reaching 1.4% in March 2025 and 1.3% in September 2025. This indicates improved borrower behaviour and better risk assessment by banks.
Lower slippages suggest that credit growth is not coming at the cost of asset quality. It also reflects strengthened supervision, early warning systems, and tighter underwriting standards post the NPA crisis of the previous decade.
For governance, declining slippages reduce the future pipeline of stressed assets, thereby lowering fiscal and quasi-fiscal risks associated with bank recapitalisation.
If slippages were rising, current NPA improvements would be temporary, leading to a renewed stress cycle and undermining confidence in banking reforms.
Falling slippage ratios show that asset quality improvement is structural rather than cyclical; ignoring early credit risks would merely defer the NPA problem.
Key statistics:
- Slippage ratio: 1.4% (Mar 2025) → 1.3% (Sep 2025)
3. Evolution of Insolvency Framework: From Delays to IBC
India’s journey towards faster resolution of corporate distress began with the Eradi Committee (1999), whose recommendations led to company law reforms and the establishment of the National Company Law Tribunal (NCLT). This marked a shift from fragmented and slow judicial processes.
Prior to the Insolvency and Bankruptcy Code (IBC), recovery cases moved from civil courts to Debt Recovery Tribunals (DRTs) under the Recovery of Debts and Bankruptcy Act, 1993. However, these mechanisms suffered from long delays, often exceeding a decade, leading to severe asset value erosion.
The IBC, legislated in 2016 based on the Bankruptcy Law Reforms Committee (T.K. Viswanathan) report, created a single-window insolvency framework under the IBBI and NCLT, aiming to minimise time and cost of resolution.
Without such consolidation, recovery mechanisms would remain fragmented, discouraging credit flow and increasing the cost of capital in the economy.
Institutional consolidation through IBC corrected decades of legal inefficiency; neglecting such reform would perpetuate value destruction and credit stagnation.
4. Working of the IBC–NCLT Resolution Process
Under the IBC, once a case is admitted by the NCLT, an Interim Resolution Professional (IRP) is appointed to collate claims and constitute the Committee of Creditors (CoC) comprising financial creditors. This ensures creditor-driven resolution.
The process involves preparation of an information memorandum, invitation of expressions of interest, evaluation of resolution plans, and approval by the CoC. The Supreme Court has upheld the primacy of CoC’s commercial wisdom, limiting judicial interference.
The Resolution Professional (RP) submits the approved plan to the NCLT for final approval. Regulations restrict late bids to maintain timelines, though flexibility exists in exceptional cases.
If this structured process weakens, uncertainty for investors and creditors would rise, diluting the credibility of insolvency resolution.
The creditor-in-control model under IBC aligns incentives for faster resolution; undermining it would revive litigation-driven delays.
5. Rising Pendency and Time Overruns in NCLT
Despite institutional gains, delays have emerged as a critical challenge. The average time for resolution rose from 375 days (FY20) to 713 days (FY25), far exceeding the statutory 270-day limit, and even the amended 330-day cap including litigation.
Case pendency has remained persistently high. In FY25, although 723 cases were admitted, 1,926 cases remained pending, reflecting capacity constraints rather than declining insolvency incidence.
Prolonged resolution erodes asset value, reduces recovery for creditors, and delays redeployment of capital to productive uses, weakening economic efficiency.
If delays persist, the credibility of IBC as a time-bound mechanism will erode, encouraging strategic defaults and litigation.
Time overruns negate the core economic logic of IBC—value maximisation through speed; ignoring delays risks turning resolution into prolonged liquidation.
Key statistics:
- Average resolution time: 375 days (FY20) → 713 days (FY25)
- Pending cases: 1,926 (FY25)
6. Institutional Capacity Constraints and Reforms
The NCLT currently operates with 39 members against a sanctioned strength of 63 across 16 Benches. This shortage directly contributes to rising pendency and delayed hearings.
The government proposes to raise the strength to 85 members immediately, with plans to add 200 more in coming years. This expansion aims to align institutional capacity with the growing insolvency caseload.
Additionally, a recent IBC amendment has introduced a group insolvency framework, enabling creditor-initiated, out-of-court resolution for related entities, potentially reducing procedural delays.
Without timely capacity augmentation, even well-designed legal frameworks fail at the implementation stage.
Institutional capacity is the backbone of legal reform; ignoring staffing and bench strength converts procedural efficiency into systemic delay.
Policy measures:
- Increase NCLT members: 39 → 85 (proposed)
- Introduction of group insolvency framework
7. Impact on Banking Stability and Economic Recovery
Through the IBC–NCLT mechanism, banks and creditors have resolved and realised at least ₹4 trillion, significantly strengthening balance sheets and improving lending capacity.
Faster recycling of stressed assets enables banks to extend fresh credit, while transfer of management to new owners helps revive closed or inefficient firms, supporting employment and growth.
Although higher courts have overturned some NCLT/NCLAT decisions on procedural grounds, the overall framework has proven critical in restoring credit discipline.
If resolution slows, capital remains locked in unproductive assets, weakening investment and growth prospects.
Efficient insolvency resolution links financial stability with real-sector revival; delays sever this linkage and dampen growth.
Conclusion
India’s declining NPAs reflect the cumulative impact of provisioning discipline and institutional insolvency reforms under the IBC. However, rising delays at the NCLT threaten to dilute these gains. Strengthening adjudicatory capacity, enforcing timelines, and leveraging new frameworks like group insolvency are essential to sustain banking stability and support long-term economic growth.
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