Banking Structure, NPAs, Bank Reforms and the Insolvency Code

Structure of Indian banking

Banks are divided into scheduled banks, listed in the Second Schedule of the RBI Act (paid-up capital and reserves of at least ₹5 lakh, and run in the interest of depositors), and non-scheduled banks.

Commercial banks:

• Public sector banks (PSBs): 12 after the mergers of 2019–20. The largest is SBI.
• Private sector banks.
• Foreign banks.
• Regional Rural Banks (RRBs), set up under the RRB Act 1976 (Narasimham Working Group). They are owned by the Centre (50%), the sponsor bank (35%) and the state (15%). A "One State, One RRB" consolidation in 2025 reduced their number to about 28.
• Small Finance Banks (SFBs), licensed from 2015: they must lend 75% of their credit to the priority sector.
• Payments Banks (2015): they cannot lend, can take deposits up to ₹2 lakh per customer, and must invest in G-secs.

Cooperative banks:

• Urban cooperative banks.
• Rural cooperatives: state cooperative banks, district central cooperative banks, and primary agricultural credit societies (PACS).

The Banking Regulation (Amendment) Act 2020 brought cooperative banks more fully under RBI supervision after the PMC Bank crisis (2019).

Development financial institutions: NABARD (1982), SIDBI (1990), NHB (1988), EXIM Bank (1982), and the National Bank for Financing Infrastructure and Development (NaBFID, 2021).

History of reform

• 1955: Imperial Bank → State Bank of India.
• 1969: 14 major banks nationalised (deposits above ₹50 crore).
• 1980: 6 more nationalised. The aims were mass banking, priority sector lending and branch expansion in rural areas.
• Narasimham Committee I (1991): reduce SLR/CRR, deregulate interest rates, introduce prudential norms (income recognition, asset classification), and allow private banks (new licences from 1993, such as HDFC Bank and ICICI Bank).
• Narasimham Committee II (1998): stronger capital adequacy, mergers of strong banks, and "narrow banking" for weak banks.
• Basel norms: India follows Basel III, with the minimum capital-to-risk-weighted assets ratio (CRAR) set at 9% (higher than Basel's 8%) plus a capital conservation buffer of 2.5%.
• 2015: the Indradhanush plan for PSBs, covering appointments, the Bank Board Bureau, capitalisation, de-stressing, empowerment, accountability and governance.
• 2017–21: PSB recapitalisation through recapitalisation bonds (about ₹2.1 lakh crore from 2017).
• Mergers: SBI absorbed its associates and Bharatiya Mahila Bank (2017); Bank of Baroda merged with Vijaya Bank and Dena Bank (2019); in 2020, PNB took over OBC and United Bank, Canara took Syndicate, Union took Andhra and Corporation, and Indian Bank took Allahabad Bank.

Non-performing assets (NPAs)

A loan becomes an NPA when interest or principal is overdue for more than 90 days. NPA categories are sub-standard (NPA up to 12 months), doubtful (more than 12 months) and loss assets. Provisioning means setting aside funds against expected losses.

The twin balance sheet problem: the Economic Survey 2016–17 described over-leveraged corporates together with stressed bank balance sheets. Its causes:

• the infrastructure lending boom of 2006–11;
• project delays;
• commodity price falls;
• weak appraisal;
• "evergreening", where new loans are given to repay old ones.

The RBI's Asset Quality Review (2015) forced banks to recognise hidden stress. Gross NPAs of scheduled commercial banks peaked at about 11.2% in March 2018. They then fell steadily, to around 2.3% by March 2025, the lowest in over a decade (RBI Financial Stability Report). Report later figures from the latest FSR.

Resolution tools:

• SARFAESI Act 2002: lets banks seize and sell secured assets without court intervention, and enables Asset Reconstruction Companies (ARCs).
• Debt Recovery Tribunals (DRTs), set up in 1993.
• Lok Adalats.
• Prompt Corrective Action (PCA) framework: restrictions on weak banks based on capital, asset quality and leverage thresholds.
• National Asset Reconstruction Company Ltd (NARCL), a "bad bank" set up in 2021, with a government guarantee on security receipts. It works with the India Debt Resolution Company.

Insolvency and Bankruptcy Code (IBC) 2016

Purpose: time-bound resolution of insolvency for companies, partnerships and individuals, moving from "debtor in possession" to "creditor in control".

Process (Corporate Insolvency Resolution Process, CIRP):

1. A financial creditor, operational creditor or the company itself applies to the National Company Law Tribunal (NCLT). The default threshold is ₹1 crore.
2. The application is admitted, a moratorium begins, and an Interim Resolution Professional takes control.
3. A Committee of Creditors (CoC) of financial creditors is formed. It approves a resolution plan with 66% of the vote.
4. The time limit is 180 days, extendable by 90 days, with an overall cap of 330 days including litigation (2019 amendment).
5. If there is no plan, the company goes into liquidation.

Appeals go to the NCLAT, then the Supreme Court. Regulator: the Insolvency and Bankruptcy Board of India (IBBI). Section 29A bars defaulting promoters from bidding.

Other features:

• Pre-packaged insolvency for MSMEs (2021).
• In *Swiss Ribbons* (2019) the Supreme Court upheld the Code.
• In *Essar Steel* (2019) it upheld the commercial wisdom of the CoC.

Outcomes and issues:

• The IBC improved credit discipline. Promoters now settle before admission, under Section 12A.
• Delays: average resolution time far exceeds 330 days.
• Haircuts are high: creditors recover on average about a third of admitted claims, with large losses in some cases.
• NCLT benches are overburdened.
• Most cases end in liquidation, many of them firms that were already defunct.
• Amendments have been proposed to speed up the process.

Deposit insurance

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI, insures bank deposits up to ₹5 lakh per depositor per bank. The limit was raised from ₹1 lakh in 2020. The 2021 amendment ensures payout within 90 days when a bank is placed under restrictions.

Analysis: public vs private banks

PSBs have advanced financial inclusion, carried out Jan Dhan accounts and lent to agriculture. But they have had governance problems: government ownership, dual regulation, and limits on pay and talent. The P.J. Nayak Committee (2014) recommended reducing government holding below 50% and creating a bank holding company. The Banking Laws (Amendment) Act 2025 made changes such as allowing up to four nominees per account. Privatisation of two PSBs was announced in 2021, and IDBI Bank strategic sale was under way. Report the outcome as per the latest status.

Quick self-test

1. *When does a loan become an NPA?* When interest or principal is overdue for more than 90 days.
2. *Who approves a resolution plan under IBC?* The Committee of Creditors, with 66% of the vote, subject to NCLT approval.
3. *What is the DICGC cover?* ₹5 lakh per depositor per bank.
4. *What can a payments bank not do?* Lend.

Practice: Mains question

*"The Insolvency and Bankruptcy Code has changed the creditor–debtor relationship in India, but implementation challenges persist." Examine. (250 words)*

Common prelims traps

• RRB ownership is split 50:35:15 between the Centre, the sponsor bank and the state.
• Small finance banks must lend 75% of credit to the priority sector. Payments banks cannot lend at all.
• The IBC threshold was raised from ₹1 lakh to ₹1 crore in March 2020.
• NCLT handles corporate insolvency. DRTs handle individual insolvency and personal guarantors.