07th June 2025, Gaurav Kumar Singh
Understanding Bad Loans and the Indian NPA Crisis
A bad loan, or what banks refer to as a Non-Performing Asset (NPA), occurs when a borrower fails to repay the interest or principal for more than 90 days. At first glance, this might appear as a routine banking risk. However, when these bad loans pile up across banks—especially public sector ones—they begin to threaten the very stability of the financial system. In India’s case, they did just that.
During the mid-2000s, India’s economy was growing at a fast pace. Banks, flush with funds, lent freely to large infrastructure and corporate projects in anticipation of continued economic expansion.
Between 2004 and 2008, credit was cheap, and corporate ambitions were sky-high. Unfortunately, these loans were often disbursed without adequate due diligence. Many of the projects funded during this period were capital-intensive, long-gestation projects that were vulnerable to delays.
After the global financial crisis of 2008, several of these projects faced unforeseen hurdles—ranging from environmental clearances to land acquisition issues, policy bottlenecks, and cost overruns. As repayments stopped, banks continued to roll over these loans instead of declaring them as NPAs, masking the actual damage. But the problem couldn’t be hidden forever.
The real shock came in 2015 when the Reserve Bank of India, under then Governor Raghuram Rajan, ordered an Asset Quality Review (AQR) of banks. This move forced banks to come clean and declare their hidden NPAs. The result was a financial earthquake—India’s banking system, particularly its public sector banks, was sitting on a mountain of bad loans.
The Damage Done
The numbers were staggering. By 2018, India’s total NPAs had crossed ₹10 lakh crore, with public sector banks accounting for nearly 85% of that burden. Banks like Punjab National Bank, IDBI Bank, and the State Bank of India recorded massive losses. Lending slowed down, credit to small businesses dried up, and the banks’ balance sheets were left bleeding.
The government was forced to intervene. More than ₹3 lakh crore was pumped into public sector banks through recapitalization to keep them afloat. Reforms followed, including the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016, which aimed to fast-track the recovery of bad loans. But by then, the damage was deep and systemic.
Who Were the Major Culprits Behind India’s Bad Loan Crisis?
At the heart of this crisis lay several high-profile corporate defaults that contributed significantly to the NPA pile.
Among the most notorious was Vijay Mallya’s Kingfisher Airlines, which defaulted on loans worth over ₹9,000 crore. Mallya’s flamboyant lifestyle was at odds with the financial mess his airline was in. Loans from banks like SBI and PNB were taken and never repaid, even as the airline shut down. Mallya eventually fled the country and became the poster child of India’s wilful defaulters.
Next came the shocking ₹13,000 crore fraud involving Nirav Modi and Mehul Choksi, who orchestrated one of the biggest banking scams in Indian history by exploiting fake Letters of Undertaking (LoUs) from Punjab National Bank. The magnitude of the scam sent PNB’s stock crashing and shook the credibility of India’s banking sector globally.
Another colossal default was that of Bhushan Steel, which owed banks over ₹44,000 crore. Poor financial planning and excessive borrowing caused the company’s downfall. It was one of the first big cases to be resolved under the IBC, eventually being acquired by Tata Steel.
The Essar Steel case followed a similar path, with over ₹49,000 crore in unpaid loans. After a prolonged legal battle, it was finally taken over by ArcelorMittal, one of the world’s largest steelmakers. Though some amount was recovered, the lengthy delay highlighted weaknesses in the insolvency resolution process.
Perhaps the most complex case was that of Infrastructure Leasing & Financial Services (IL&FS), which owed over ₹94,000 crore. Unlike typical defaulters, IL&FS was a shadow banking giant with more than 300 subsidiaries. Its default triggered a panic in India’s financial markets and exposed the vulnerabilities in the NBFC (non-banking financial company) sector.
Then there was Amtek Auto, which defaulted on over ₹12,700 crore in loans, and DHFL (Dewan Housing Finance Ltd), whose ₹31,000 crore default uncovered fund diversion and poor internal controls. DHFL was the first financial services firm to go through the IBC, eventually being sold to the Piramal Group at a steep haircut.
Gitanjali Gems, led by Mehul Choksi, was another high-profile case linked to the Nirav Modi scam. Alongside PNB, many banks found themselves caught in a web of fake guarantees and international fraud.
Even major names in aviation and consumer electronics weren’t spared. Jet Airways, once India’s leading private airline, defaulted on loans worth ₹8,500 crore due to poor management and rising debt. Similarly, Videocon Group defaulted on over ₹47,000 crore, further entangling former ICICI Bank CEO Chanda Kochhar in a conflict-of-interest controversy.
How the Government and RBI Tried to Fix the Crisis?
In response, the government and the RBI launched several reform measures. Apart from recapitalizing banks and introducing the IBC, they merged weak banks with stronger ones to create more robust institutions. Strict frameworks like Prompt Corrective Action (PCA) were introduced to restrict poor-performing banks from risky lending.
The RBI also pushed for better credit tracking systems like the Public Credit Registry to prevent loan stacking and default masking.
While these steps led to improvements—NPAs as a percentage of total loans came down from 11.2% in 2018 to around 5.8% by 2024—the progress was hard-earned. Resolutions under the IBC did help recover over ₹2.5 lakh crore, but most came with heavy haircuts, with creditors recovering just a fraction of what they were owed.
Lessons from the Crisis
The Indian NPA crisis teaches us that there’s no such thing as risk-free lending. Easy credit, unchecked corporate borrowing, and weak oversight created a perfect storm. What followed was a loss of public trust, massive losses to taxpayers, and economic stagnation.
Banks must learn to separate business from political pressure and practice rigorous due diligence. Regulators must act sooner, not later. And most importantly, wilful defaulters must be held legally accountable—not allowed to escape with bailouts or political cover.
Conclusion
India’s bad loan crisis wasn’t just about numbers—it was a wake-up call. It exposed deep-rooted problems in our financial system: from crony capitalism to poor governance, from regulatory inertia to corporate greed. While reforms have improved the situation today, the risk is far from over.
If India is to build a resilient financial future, it must ensure that the mistakes of the past are never repeated—and that the doors of banks open only to those who treat borrowed money with the seriousness it deserves.
If you found this article valuable, please don’t forget to Like and Subscribe to my blog for more expert insights and updates.
THE MIND UPGRADE 
Leave a comment