PSU Banks lead India’s NPA clean-up

India’s banking system continued its steady clean‑up in 2024‑25, extending a multi‑year improvement in asset quality that began in 2018‑19. By the end of March 2025, the Gross NPA (GNPA) ratio of scheduled commercial banks (SCBs) had fallen to a multi‑decadal low of 2.2%, down from 2.7% a year earlier. This decline was powered significantly by public sector banks (PSBs), whose GNPA ratio dropped sharply from 3.5% to 2.6%, marking the most substantial improvement among bank groups.

What drove the system-wide reduction process?

Much of the system-wide reduction was driven by recoveries and upgradations, which together accounted for 42.8% of the GNPA decline. PSBs alone recovered Rs 33,630 crore and upgraded another Rs 13,847 crore, while also executing large write-offs to accelerate balance sheet cleansing. Their closing GNPA stock fell from Rs 3.39 lakh crore to Rs 2.83 lakh crore in just one year.

Private banks (PVBs) also maintained discipline, with GNPA ratios inching down from 1.9% to 1.8%, supported by strong recoveries and upgrades. Foreign banks remained the cleanest segment with sub‑1% GNPA levels.

Small Finance Banks

However, the outlier in this otherwise positive narrative was the Small Finance Banks (SFBs). Their GNPA ratio rose sharply from 2.4% to 3.6%, and net NPAs nearly doubled from 0.8% to 1.4%.

Higher slippages and slower recoveries pushed their GNPA stock up to almost Rs 10,000 crore, signalling stress in granular retail and microfinance portfolios. By September 2025, the system’s GNPA ratio eased further to 2.1%, and slippages fell for the fifth consecutive year.