Why this matters now
NPAs, the IBC, bank recapitalisation/mergers and the bad bank are core GS-3 topics — banking health directly shapes credit, investment and growth.
The NPA problem
An NPA is a loan on which interest/principal is overdue beyond 90 days. The mid-2010s saw NPAs surge — especially in public-sector banks — due to over-lending in the boom, stalled projects and some wilful defaults. Combined with stressed corporate balance sheets, this became the “twin balance sheet” problem, choking fresh lending.
Key reforms
The response — the 4R strategy (Recognition, Resolution, Recapitalisation, Reforms) — included the Asset Quality Review, the Insolvency and Bankruptcy Code (IBC), 2016 for time-bound resolution, large recapitalisation of PSBs, mega-mergers (consolidating PSBs), and the bad bank (NARCL) to take over legacy bad loans.
The way forward
NPAs have since fallen to multi-year lows, but priorities remain: strengthening governance and risk management, PSB privatisation/disinvestment debates, prompt corrective action, and deepening credit — while guarding against fresh stress (e.g. in unsecured retail lending).
UPSC angle
Know what an NPA is (90-day overdue), the twin-balance-sheet problem, the 4R strategy, the IBC 2016, PSB recapitalisation and mergers, and the bad bank (NARCL). Link to credit and growth.
Frequently asked questions
What is a Non-Performing Asset (NPA)?
A loan on which interest or principal payment is overdue for more than 90 days.
What is the twin-balance-sheet problem?
The simultaneous stress on bank balance sheets (NPAs) and over-leveraged corporate balance sheets, which choked lending and investment.
What is the IBC?
The Insolvency and Bankruptcy Code, 2016 — a law for the time-bound resolution of stressed assets and insolvent firms.
What is the bad bank?
The National Asset Reconstruction Company Ltd (NARCL), set up to take over and resolve banks’ legacy bad loans.