India’s banking sector has made significant progress in improving asset quality, with gross non-performing assets (NPAs) at a decadal low. However, the stressed-asset market (which includes both gross NPAs and technical written-off accounts) remains sizeable at Rs 12.2 lakh crore in FY25. Between FY19 and FY25, banks wrote off Rs 14.06 lakh crore, against recoveries and upgrades of Rs 9.55 lakh crore. Write-offs have helped bring down reported bad loans, but they do not automatically end recovery efforts.
It is important to distinguish between two categories of write-offs. The first represents ultimate losses or haircuts recognised after exhausting all efforts of recovery. The second comprises prudential write-offs, undertaken to comply with accounting and regulatory requirements. Under this approach, NPAs are written down to zero after a maximum period of four years, irrespective of the recovery potential.
Banks continue to pursue recoveries in such technically written-off accounts, including through sales to Asset Reconstruction Companies (ARCs). This analysis excludes Special Mention Accounts (SMAs), or pre-NPA accounts, which are permitted to be sold to ARCs, due to possible upgradations and regularisation as standard assets.
Gross NPA is not a static number of outstanding levels only. A meaningful assessment must also account for the annual flow of fresh slippage, recovery, upgradation and resolutions. New NPAs are a natural part of lending, as credit risk can never be zero, even with the most robust underwriting standards. Even the highest-rated AAA entities have some risk of default.
While banks’ resolution capability has substantially improved, fresh NPAs continue to exceed NPA reductions, resulting in a net increase in NPAs. Therefore, a decline in reported NPA levels needs to be viewed in the context of how much has been recovered or upgraded and how much has been written off. The market for ARCs continues to remain sizeable. The nature of these stressed assets may be changing, with stress in retail loans being the mainstay rather than corporate loans. The seller base could be moving away from banks to NBFCs.
The Reserve Bank of India’s Financial Stability Report released in June 2026 reported a slippage ratio of 3.6% for NBFCs, compared to 1.2% for banks. This indicates that NBFCs could become an important source of stressed assets for ARCs.
While the sectoral composition of entities originating NPAs may evolve, the overall availability of stressed assets for ARCs has remained relatively stable. However, rising interest rates and tighter monetary conditions could put additional pressure on borrowers and lenders with thin margins, leading to greater stress in asset quality in the coming years.
Gross NPAs have declined significantly from Rs 10.39 lakh crore in 2019 to Rs 4.32 lakh crore as of March 2025, highlighting huge improvement. However, a closer examination reveals:
Between 2019 and 2025, fresh NPAs of Rs 20.38 lakh crore were added, while recoveries and upgradation amounted to only Rs 9.55 lakh crore.
During the same period, Rs 14.06 lakh crore was written off, making write-offs a key contributor to the reduction in reported NPA levels.
Let us now look specifically into technical written-off accounts, which are an effective part of the NPA market.
The following table gives an effective NPAs market size available from banks. Over the past seven years, there is an overall market of around Rs 12–14 lakh crore of NPAs, from banks only (excluding other financial institutions like NBFCs and housing finance companies) even as reported gross NPA levels have been declining each passing year.
At the cost of repetition, technical write-offs are accounting entries and available for resolution, including sale to ARCs.
Given the stock of outstanding stressed assets, ARCs have a crucial role to play in facilitating their resolution and unlocking value for the financial system. This requires bridging the valuation expectations of sellers (banks) and buyers (ARCs) and strengthening confidence in the integrity and transparency of the market process.
Recognising these challenges, a five-member IBA Committee examined the NPA sale process, the information checklist to be shared, and the standardisation of transaction documents to facilitate market making.
The market will deepen as participants move towards a collaborative, win-win approach that maximises value realisation. This would help unlock the full potential of the stressed assets market, support the growth of the ARC industry, and enable banks to redeploy their resources towards their core function of lending. Given the critical role of credit in supporting economic activity, a more efficient stressed assets market can also contribute to strengthening credit flows and supporting overall economic growth.
(The author is CEO, Association of ARCs in India. Views are personal).
