Bad loans move from factories to farms as industrial NPAs fall to 1.96% in FY26

By: Team India Tracker

State-run banks still have higher non-performing loan ratios than private lenders across agriculture, industry and services. Retail credit is the exception: since FY25, private banks have reported a higher share of bad personal loans

Banks have made significant progress in cleaning up their bad loans over the past decade. Simply put, defaults have fallen, balance sheets have strengthened and gross non-performing assets (GNPAs) have dropped below 2 per cent in FY26, their lowest level in at least a decade.

However, beneath the surface, a different story emerges. The composition of bad loans has changed as the stress shifted from large industrial borrowers to agriculture, which has implications, given the social cost of distress in rural India.

The overall GNPA ratio or toxic loan of scheduled commercial banks fell below 2 per cent in FY26. A decade ago, the ratio was 8.58 per cent in FY17 and rose to a peak of 11.21 per cent in FY18. It has declined every year since.

The clean-up has been particularly striking in industry. Industrial bad loans have fallen sharply, from a peak of 20.29 per cent in FY18 to 1.96 per cent in FY26. Industry, once the biggest source of stress for banks, is no longer their most troubled lending segment. Agriculture has taken its place.

Farm-loan stress rose steadily from FY17 and overtook industry in FY22, when agricultural NPAs reached 9.96 per cent, against 9.45 per cent for industry. Although the ratio has eased since then, it remained above 6 per cent in FY26, making agriculture the most stressed major lending segment.

The contrast with other borrowers is stark. The NPA ratio for services was 1.84 per cent in FY26, while that for retail or personal loans was only 1.12 per cent.

That changes the nature of the banking problem. India has largely contained the corporate bad-loan crisis that threatened banks a decade ago. The bigger challenge now is spread across millions of smaller farm borrowers, where repayment capacity is more closely tied to crop prices, weather, rural incomes and periodic debt relief.

There is also a sharp divide between public and private banks.

Public sector banks (PSBs) continue to report higher NPAs than private banks in agriculture, industry and services. Retail loans are the exception: private banks have had a higher proportion of bad personal loans than PSBs since FY25.

The difference is important because PSBs were at the heart of the previous NPA crisis. Their gross bad-loan ratio came close to 15 per cent in FY18. By FY26, it had fallen below 2 per cent. Private banks never experienced anything close to the highs seen at PSBs, and their GNPA ratio is now only marginally below that of public lenders.

The improvement was the result of deliberate policy rather than a simple change in the economic cycle.

In 2015, the Reserve Bank of India’s asset quality review forced lenders to recognise stressed loans more earnestly. The government followed with its “4R” approach: recognising bad loans transparently, resolving and recovering money from stressed accounts, recapitalising PSBs, and reforming banks and the wider financial system.

The Insolvency and Bankruptcy Code was a crucial part of that effort. It changed the balance of power between lenders and borrowers by allowing defaulting promoters to lose control of their companies and preventing wilful defaulters from buying them back.

Other recovery mechanisms, including the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, were strengthened. Banks also became more aggressive in identifying stressed accounts before they turned into full-blown NPAs.

The result is visible in the headline numbers. But the numbers need to be read carefully.

Scheduled commercial banks wrote off nearly Rs 16.35 trillion of bad loans over the decade to FY24. Writing off a loan removes it from the bank’s books; it does not mean the money has been recovered.

And actual recoveries against these written-off loans have remained at only 13-18 per cent.

That distinction is critical. The fall in the NPA ratio therefore cannot be read simply as evidence that borrowers have repaid their debts or that banks have recovered all the money they were owed. A substantial part of the clean-up has also come from removing unrecoverable loans from the balance sheet.

This does not diminish the scale of the banking-sector repair. A banking system with GNPAs below 2 per cent is in a far healthier position than one with bad loans above 11 per cent.

But it does change the question India must ask next.

The corporate bad-loan crisis has largely been brought under control. The emerging pressure is increasingly rural, particularly in agriculture. For banks, that means better underwriting and early detection of stress will matter as much as recovering old corporate dues.

For policymakers, it means that a cleaner banking system cannot be the end of the exercise. If farm stress remains persistently above 6 per cent while industrial stress has fallen below 2 per cent, the next phase of India’s NPA battle will require understanding why agricultural borrowers struggle to repay — and finding ways to address that problem before it becomes the next systemic burden.

The bad-loan story has therefore improved dramatically. But it has not disappeared. It has moved.