Bad loans at a decade low, but stress in agriculture sector persists

While public sector banks have cleaned up their balance sheets to match private peers overall, private lenders now hold a higher share of bad debt in retail loans

Banks have in recent years reported fewer defaults, cleaner books and healthier balance sheets — a heartening trend in how India is dealing with non-performing assets (NPAs), or bad loans. As things change structurally, the question is who actually holds that debt now. A decade ago, it was big industrialists who posed the greatest risk to banks. Now that burden is in agriculture, a shift that is worrying for a country where a farmer dies by suicide every hour.

 

A related trend appears in comparing banks by ownership: Public sector banks (PSBs) consistently report higher NPAs than private banks. This pattern holds across loans for agriculture, industry and services. Retail — or personal loans — are the only segment where private banks fare worse.

 

Gross NPAs (GNPAs) for all scheduled commercial banks fell below 2 per cent in FY26, the first time the overall level has fallen below that mark in at least a decade. GNPAs stood at 8.58 per cent in FY17 and peaked at 11.21 per cent in FY18. Since then, asset quality has improved steadily, with the ratio declining each year.

 

The bad-loan ratio in the industrial sector fell from a peak of 20.29 per cent in FY18 to just 1.96 per cent in FY26. Agriculture, by contrast, kept increasing from FY17 and overtook industry in FY22, when its ratio touched 9.96 per cent against industry’s 9.45 per cent. It has since eased a little but is above 6 per cent and tops the list of stressed sectors. The ratios for services and retail loans were far lower at 1.84 per cent and 1.12 per cent, respectively, in FY26. 

 

Ownership adds another layer to this story. Private banks have held more retail loan NPAs than PSBs since FY25. In every other category, PSBs carry more bad debt than private banks, even though their GNPAs have declined sharply over the decade.  

 

PSBs, the epicentre of the last decade’s NPA stress, saw their bad-loan ratio touch nearly 15 per cent in FY18, before declining to under 2 per cent by FY26. Private banks’ GNPAs now stands just a shade behind that of PSBs. Over the decade, their bad debt never reached the highs PSBs did. 

 

This turnaround was not accidental. The Reserve Bank of India initiated an asset quality review in 2015, after which the government rolled out a “4R” strategy to recognise NPAs transparently, resolve and recover value from stressed accounts through effective laws and processes, recapitalise PSBs, and reform banks and the wider financial ecosystem.

 

The Insolvency and Bankruptcy Code changed the rules, defaulting promoters lost control of their companies, and wilful defaulters were barred from buying them back. Recovery laws, including the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, were also tightened, and banks began tracking stressed accounts more closely, catching trouble early before it could snowball.

 

Even so, part of this improvement comes with a caveat. Scheduled commercial banks have written off close to Rs 16.35 trillion in bad loans over the decade to FY24, this clears loans off the books. Recoveries against these written-off loans have stayed in the range of only 13-18 per cent. Thus, the falling NPA number isn’t just banks recovering dues, a lot of it is banks writing the debt off their books.