A decade ago, the banking system was facing ballooning bad loans. Public sector banks were loaded with bad debts, and defaulting promoters retained control of failing companies while creditors waited to recover investments. The Insolvency and Bankruptcy Code (IBC), enacted in 2016, set out to change that.
Ten years on, the transformation of India's banking sector is significant. Gross non-performing assets (GNPAs) of Scheduled Commercial Banks, which had peaked at over 11.5% in FY18 after the Reserve Bank of India's (RBI) Asset Quality Review, have fallen to about 2.0–2.3% in FY26. Net NPAs have dropped to near 0.5%, among the lowest in decades.
Public sector banks now have gross NPA ratios that declined from around 10–12% in 2016 to a 2.5% by September 2025.
How the cleanup took place
The improvement in asset quality came about with a sustained campaign of balance-sheet cleaning through IBC-led resolutions, government bank recapitalization, tighter stress recognition norms, and robust credit discipline. These reshaped lending in India, in fact.
Profitability has improved substantially. Public sector banks reported combined net profits of nearly ₹1.98 trillion in FY25. Capital adequacy ratios across the banking system have improved to about 17%, allowing banks to extend credit and help economic growth.
The data shows the cleanup. State Bank of India reduced its GNPA ratio from 6.50% in FY16 to 1.49% in FY26—a decline of over five percentage points—and its net NPA fell from 3.81% to 0.39%. Punjab National Bank saw an even steeper improvement: GNPA fell from 12.90% to 2.95%, and net NPA dropped from 8.61% to 0.29%. Axis Bank's GNPA improved from 1.67% to 1.23%, with net NPA declining from 0.70% to 0.37%.
HDFC Bank, which entered this decade with a relatively clean book, showed broadly stable metrics—its GNPA moved from around 0.94–1.05% in FY16 to 1.15% in FY26, while net NPA rose marginally from approximately 0.28% to 0.38%.
IBC helped focus recovery
IBC's had a major role in driving recoveries. In FY25, the framework accounted for 52.3% of total bank recoveries. Scheduled Commercial Banks recovered ₹54,528 crore through insolvency proceedings out of total recoveries of ₹1.04 trillion, according to data presented by finance minister Nirmala Sitharaman in the Lok Sabha.
Cumulative recoveries under IBC crossed ₹4.11 trillion through December 2025, with financial creditors realizing an average of 31-36% of admitted claims—more than double the 15–20% recovery under pre-IBC mechanisms. Resolutions too delivered recoveries worth about 171% of liquidation value on average—due to the Code's emphasis on keeping businesses alive and preserving value rather than liquidating them.
Rajnish Kumar, former chairman of State Bank of India, said that the IBC was a turning point for the banking industry.
The Code has been “a game changer,” he said. “It has changed the creditor-debtor relationship, which weighed heavily in favour of debtors (earlier). The banking system has emerged stronger.”
Giving power to creditors
Before IBC, large defaulters could drag out recovery proceedings for years across courts and tribunals, often retaining control of their companies even as creditors absorbed losses. The Code changed that equation by vesting authority in the Committee of Creditors.
Former RBI deputy governor N.S. Vishwanathan said IBC had overtaken traditional recovery channels, including Debt Recovery Tribunals, to become the single largest source of bad loan recoveries for banks. “The framework changed borrower behaviour by creating the risk of losing ownership and control of companies after default.”
He also flagged a crucial condition for the framework's effectiveness. "If lenders want stronger recoveries through IBC, they have to act before the value of assets completely deteriorates," he said.
Mukesh Chand, senior legal counsel at Economic Laws Practice, pointed to landmark resolutions as proof that early intervention preserves value.
"Cases like Essar Steel, Bhushan Steel, Electrosteel and Bhushan Power show that timely intervention preserves value. Importantly, IBC shifted control to lenders through the Committee of Creditors, unlike earlier regimes where banks were largely at the receiving end," Chand said. He acknowledged that some concerns over steep haircuts and delays in large cases persist still.
A shift in lending culture
At a workshop on the IBC in New Delhi on 19 May, M. Nagaraju, secretary of the department of financial services, said that over 8,800 Corporate Insolvency Resolution Processes had been admitted through December 2025, with more than 4,000 corporate debtors assisted through various mechanisms.
"The insolvency ecosystem had steadily shifted from liquidation towards revival and value maximization," he said, adding that recent amendments on group insolvency, cross-border insolvency and creditor-initiated processes were expected to reduce delays and strengthen the framework further.
Sanjay Agarwal, senior director at CARE Edge Ratings, said IBC had driven a change in how Indian businesses approach leverage.
"GNPAs of the industry segment (i.e. manufacturing and infrastructure segments only) of banks have fallen from 22.8% in FY18 to around 2% in FY26. Promoters are now more willing to procure external equity rather than take the financing risk of high leverage," Agarwal said.
- Bank GNPAs fell from 11.5% in FY18 to 2.3% in FY26.
- IBC accounted for 52.3% of all bank recoveries in FY25.
- Cumulative IBC recoveries have crossed ₹4.11 trillion to date.
- PSBs earned record combined net profits of ₹1.98 trillion in FY25.
- IBC shifted power from defaulting promoters to creditors.