India’s Loan Recovery System Under Pressure as Defaults Rise

India’s banking sector is facing renewed stress as lenders struggle to recover dues from retail and unsecured borrowers. Even though NPAs look better on paper, recovery on the ground remains slow and inconsistent. This gap signals deeper systemic weaknesses in loan-collection mechanisms.

Banks in India are facing a widening mismatch between reported NPAs and actual money recovered. As per a Press Information Bureau release dated 3 July 2024 (PRID-2146819), public-sector banks saw their gross NPAs fall from 9.11 percent in March 2021 to 2.58 percent in March 2025.

A separate report by Reuters on 30 June 2025 highlighted that 46 major commercial banks posted a GNPA ratio of 2.3 percent, marking a multi-decade low.

However, experts caution that a large part of the NPA improvement has come from aggressive write-offs and provisioning rather than fresh recoveries. Retail, MSME and microfinance borrowers continue to struggle with repayment, and recovery teams face rising challenges.
 

This table shows visible balance sheet improvement, but it hides the pressure in unsecured and small-ticket loan categories where recovery is still weak.

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A detailed analysis published by LoansJagat on 15 September 2024 warned that unsecured loans remain the most difficult to recover because they lack collateral and involve high-risk borrowers.

How India Reached This Phase of Weak Loan Recovery?

India’s loan-recovery issues have evolved over more than a decade. Between 2014 and 2020, most stress came from large corporate exposures in steel, power, telecom and infrastructure. Many of these accounts slipped into insolvency, prompting reforms under the Insolvency and Bankruptcy Code (IBC).

Post-2020, the lending pattern changed. Banks and NBFCs expanded unsecured and small-ticket retail portfolios. While this boosted credit growth, it also exposed lenders to a borrower segment with limited repayment capacity. The slowdown after the pandemic and weak income recovery further affected repayment discipline.

Microfinance also saw rising delinquencies through 2024 and 2025, especially in states where household incomes were under pressure. These shifts pushed stress away from corporates and towards households and small businesses, creating new challenges for loan-recovery teams.
 

The shift clearly shows that retail and MSMEs have replaced corporates as the primary pressure points for recovery.

Key Statements from Stakeholders

Financial analysts note that India’s loan-recovery systems have not kept pace with the rapid expansion of unsecured lending. Rating agency CRISIL, in its 6 October 2025 outlook, mentioned that GNPA levels could rise to 2.5 percent by March 2027, driven by MSME and consumer-credit stress. 

Bankers also highlight that legal delays and weak follow-up mechanisms slow recovery even from willing borrowers.

Conclusion 

India has reduced headline NPAs, but recovery strength remains uneven. Strengthening recovery teams and improving borrower screening will be essential to prevent a fresh cycle of defaults.
 

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LoansJagat Team

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