As per RBI guidelines, it is mandatory for banks to have a loan recovery policy approved by their Boards, detailing how they plan to recover dues and reduce NPAs. Banks refer NPA cases to various channels such as DRTs, Lok Adalats, IBC, etc. depending on the nature of the case. Data from the RBI indicates that while lakhs of NPA cases are referred to these channels every year, the amount recovered remains low.
Recently, on 25 March 2025, the Government of India launched BAANKNET, a revamped e-auction portal designed to enhance the recovery of Non-Performing Assets (NPAs) by improving the efficiency and transparency of asset sales. Building on the foundation of e-BKray, which was introduced in 2019, BAANKNET integrates advanced features such as automated KYC verification, secure payment gateways, and bank-verified property titles. With all 12 Public Sector Banks (PSBs) and the Insolvency and Bankruptcy Board of India (IBBI) utilizing the platform, this initiative marks a significant step in strengthening the banking sector’s ability to recover bad loans.
Against this backdrop, we look at how NPAs are recovered in India and their magnitude. The data for the story on recovery of NPAs of Scheduled Commercial Banks has been taken from Dataful.
Non-Performing Asset or NPA refers to a loan or advance for which the borrower has stopped making interest or principal payments for a specified period. This period is usually 90 days or more in the case of banks in India, as per RBI guidelines. When a loan becomes an NPA, it means that the bank is no longer earning income from it and may face financial losses. While this definition provides a broad understanding, NPAs are classified based on detailed criteria. These include loans overdue beyond 90 days, overdraft accounts deemed “out of order,” unpaid bills, and irregularities in working capital borrowings.
Banks should have a loan recovery policy including measures to reduce NPAs
As per RBI guidelines, it is mandatory for banks to have a loan recovery policy approved by their Boards, detailing how they plan to recover dues and reduce NPAs. Based on this, banks can formulate their own recovery strategies and take necessary steps against defaulters. There are multiple ways in which banks recover NPAs. This includes recovering both the principal amount and any accrued interest that has not been paid. The recovery method is decided based on the nature of the loan and the borrower’s financial condition. Some of these are listed below:
- One-Time Settlements (OTS): Banks negotiate with borrowers to accept a lump sum amount, often lower than the total outstanding dues, to close the account.
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002: This act allows banks to seize and auction the borrower’s secured assets like property or machinery, without court intervention.
- Debt Recovery Tribunals (DRTs): These are special tribunals that handle cases of loan defaults and help banks recover dues through legal means.
- Insolvency and Bankruptcy Code (IBC), 2016: This law is used for large corporate NPAs, where the borrower’s assets can be restructured or liquidated through the National Company Law Tribunal (NCLT). The law is being implemented since 2016.
- Lok Adalats & Civil Suits: Small-value NPAs can be resolved through Lok Adalats, while larger cases may require legal action in civil courts.
In cases where defaulters flee the country, the Fugitive Economic Offenders Act, 2018 allows authorities to seize their assets and prevent them from contesting civil claims. Additionally, heads of Public Sector Banks (PSBs) can request ‘Look Out Circulars’ to stop such defaulters from leaving India.
Number of cases referred to Lok Adalats was the highest during 2021–22, while that under SARFAESI Act and DRTs peaked in 2022-23
Over the last 20 years, the number of cases referred by Scheduled Commercial Banks (SCBs) to DRTs, under SARFAESI Act, and Lok Adalats has shown a gradual increase, except in 2020-21 due to the impact of COVID-19. However, since 2021-22, the cases have increased.
Among all the mechanisms, the majority of the cases were referred to Lok Adalats, which are effective for speedy justice and recovery of small loans. It functions by amicably settling disputes that are pending in a court of law or at a pre-litigation stage. From around 1.85 lakh cases in 2004-05, the number of cases has been above one crore in the last two years.
Under SARFAESI Act, the cases went up until 2013-14 and saw a sudden dip in 2016-17. It peaked again in 2018-19 before dropping in the subsequent years. In 2021-22, the number went back to pre-COVID-19 levels. Similarly, the number of cases referred to DRTs grew until 2018-19, dropped in 2019-20 and peaked in 2022-23.
The Scheme for One-Time Settlement for SME accounts by public sector banks was closed in June 2006. That is why the number of cases was reported only in 2005-06 in the RBI Annual Report.
With respect to cases referred to IBC, between March 2020 and March 2021, the initiation of fresh insolvency proceedings under the IBC was suspended due to the COVID-19 pandemic and related economic conditions. Moreover, the debts due to non-payment during the pandemic were not regarded as default.
IBC and SARFAESI are significant channels for recovery with higher recovery rate
Furthermore, when considering the total amount, the data reveal that the yearly recovery from NPAs is considerably lower than the NPA amount involved under various recovery mechanisms.
The amount involved peaked between 2018-19 and 2019-20 in the case of DRTs, IBC, and SARFAESI, and dropped in 2020-21 and 2021-22. Apart from COVID-19, another reason for the drop could be the amalgamation of many PSBs to deal with huge NPAs.
If the amount recovered against the total amount involved is considered, the recovery rate is highest in IBC with approximately 30-50% recovery each year (except during pandemic). Even during the pandemic, with recovery of 20-23%, the share was higher than that recovered through DRTs and Lok Adalats. Recovery rate of cases pursued under the SARFAESI Act has been between 15 to 25% in most of the years.
Even though the number of cases is high with Lok Adalats and DRTs, the recovery rate is lower than that of IBC and SARFAESI. Since 2013-14, the amount recovered by DRTs has been less than 10% in 8 of the 11 years. During the same period, the amount recovered by Lok Adalats has been 6% or lesser in each year.
India’s gross NPA has declined
The large volume of NPAs in India’s banking sector poses a significant challenge for recovery as it affects the financial stability of banks and limits their ability to provide fresh credit. The Government of India has implemented comprehensive measures to reduce the NPAs, such as the Indradhanush scheme, the SARFAESI Act, etc., as mentioned in the Parliament. As per the Finance Ministry, the gross NPAs of scheduled commercial banks have declined to Rs. 4,55,278 crores (gross NPA ratio of 2.42%) in December 2024 (RBI provisional data) from a peak of Rs. 10,36,187 crores (gross NPA ratio of 11.18%) in March 2018. However, despite this decline, managing NPAs remains important to keep the banking system stable and strong.
