Public sector banks (PSBs) in India have reported their lowest levels of bad debt in several decades, according to Minister of State for Finance Pankaj Chaudhary in a written reply to the Rajya Sabha on Tuesday. The government stated that the banks are in good financial health, with significant balance-sheet improvements and high profits.
Profit Surge and Asset Quality Improvement
Cumulative profits of state-run lenders during the last financial year stood at just under Rs 2 lakh crore, nearly three times the Rs 67,000 crore recorded in 2021-22, the minister reported. Over the last five years, gross non-performing assets (NPAs) — the stock of bad debt — have declined sharply from 7.3% of advances to 1.9%, according to the government.
| Metric | FY2021-22 | Latest FY | Change |
|---|---|---|---|
| Cumulative profit | Rs 67,000 crore | ~Rs 2 lakh crore | ~3x increase |
| Gross NPA ratio | 7.3% | 1.9% | -5.4 percentage points |
The government attributed the cleanup to capital infusions, the Insolvency & Bankruptcy Code (IBC), and higher economic activity accelerating credit flow.
Role of Policy Interventions
Minister Chaudhary noted that the government had infused capital to help PSBs tide over the massive pile of bad debt, some of which had not been recognised in their books. The IBC also played a key role in the cleanup drive. Additionally, the Emergency Credit Line Guarantee Scheme (ECLGS), first introduced after the Covid lockdown, helped insulate banks during crises.
Following the West Asia war, the government launched ECLGS 5.0 to help businesses deal with liquidity mismatches and support credit flow of up to Rs 2,55,000 crore.
ECLGS and Sectoral Support
In response to a separate question in the Lok Sabha, the junior minister for finance revealed that guarantees have been issued so far for Rs 1.9 lakh crore. The sectors dominated by small businesses that topped the list include:
- Trading
- Food processing
- Textiles
Civil aviation is eligible for benefits up to Rs 5,000 crore, but so far only eight guarantees amounting to Rs 163 crore have been issued.
Implications for Trade Finance and Business
For CFOs and treasury professionals, the sharp decline in PSB NPAs and sustained credit growth signal improved bank balance sheets, which could lower the cost of trade finance and working capital loans. The ECLGS 5.0, with its focus on small businesses in key export sectors like textiles and food processing, provides a liquidity backstop that may reduce the risk premium on credit extended to these segments. However, the low uptake in civil aviation suggests that sector-specific challenges remain. Investors tracking India's banking sector should note the strengthened capital positions of PSBs, which enhance their capacity to support trade flows without requiring further government recapitalisation in the near term.
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