The good and worrying about the bad loan problem of state-owned banks

Lenders are improving asset quality but they are struggling to recover money

Punjab National Bank (PNB), the country’s second-largest state-owned lender, said earlier this month that it has identified more than 100 loan accounts worth about Rs 4,000-5,000 crore for sale as non-performing assets (NPA) to recover money.

 

Banks and financial institutions employ several legal mechanisms to recover money. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002 allows them to act on NPAs without court intervention. Debt recovery tribunals (DRTs) enable faster resolution compared to civil courts. Selling bad loans to asset reconstruction companies (ARCs) is another way to recoup losses from bad loans.

 

 

PNB’s NPAs almost doubled from Rs 10,894 crore in FY16 to Rs 21,320 crore in FY19, the government told Parliament. The amount recovered slumped to Rs 9,931 crore in FY25.

 

State Bank of India (SBI), the country’s largest lender, saw recoveries climb to Rs 35,062 crore in FY19, but the figure more than halved to Rs 14,250 crore in FY25. Bank of Baroda followed a similar pattern, with recoveries peaking at Rs 13,603 crore in FY19 and falling to Rs 7,756 crore in FY25. Canara Bank’s recoveries peaked at Rs 17,029 crore in FY22 and have since declined to Rs 9,521 crore in FY25.

 

 

SBI, PNB, Bank of Baroda, and Canara Bank, between the first quarter (Q1) of FY24 and the last one of FY25, reduced bad loans by more than half in proportion to their total loans. However, in Q1 FY26, SBI and Bank of Baroda recorded an uptick in bad loans, while PNB and Canara continued to improve.

 

 

PSBs hold the bulk of bad loans but they are improving. Their share of NPAs has dropped from 75.4 per cent in 2020 to 70.6 per cent in 2024, while that of private banks has increased from 23.3 per cent to 26.9 per cent.

 

According to the written reply in Parliament, the gross NPAs of PSBs declined to Rs 3.02 trillion (2.85 per cent of total loans) in December 2024 from a peak of Rs 8.96 trillion (14.58 per cent) in March 2018.

 

Data cited above shows that PSBs have reduced NPA ratios through regulatory reforms, but their actual recovery amounts have declined since 2019. This suggests that banks are increasingly writing off bad loans or selling them to asset companies instead of using legal options like Sarfaesi and DRTs. Such cleanup raises questions about whether banks are actually recovering enough money to maintain healthy finances.