Case study

 

Rising NPAs in State Bank of India (SBI) – Lessons from Corporate Lending

In the years following India’s rapid economic expansion, the State Bank of India (SBI) stood at the forefront of nation-building. As the country’s largest public sector bank, SBI actively financed large infrastructure, power, steel, and telecom projects, believing these sectors would drive long-term growth.

During 2014–2016, SBI approved sizeable loans to several corporate groups. These companies promised strong future cash flows and timely repayment. Initially, everything appeared normal—projects were sanctioned, funds were disbursed, and interest payments began to flow.

However, problems slowly started emerging.

Many of the funded projects faced delays due to regulatory hurdles, land acquisition issues, and cost overruns. At the same time, a global slowdown caused a sharp fall in steel and commodity prices, severely affecting the revenues of borrowing companies. As profits declined, borrowers began missing interest payments.

Inside SBI’s books, warning signs became visible. Loan accounts that were once “standard” stopped generating income. When repayments remained overdue for more than 90 days, these loans were officially classified as Non-Performing Assets (NPAs).

Large corporate accounts such as Bhushan Steel, Essar Steel, and Jaypee Group became major stress points. SBI’s Gross NPA levels rose sharply, forcing the bank to set aside huge provisions. Profits declined, shareholder confidence weakened, and the bank faced intense scrutiny from regulators and the public.

Recognizing the seriousness of the situation, SBI decided to change its approach.

With the introduction of the Insolvency and Bankruptcy Code (IBC), SBI referred several big defaulters to the National Company Law Tribunal (NCLT). Through the IBC, SBI has been able to achieve time-bound resolution of large stressed accounts, improve recovery rates, and transfer control from defaulting promoters to creditors. At the same time, strengthened credit appraisal practices—including better assessment of borrower cash flows, sectoral risks, and repayment capacity—have helped SBI prevent the creation of fresh NPAs. Together, these measures have improved SBI’s asset quality and reinforced credit discipline in the banking system. For the first time, loan recovery followed a time-bound legal process. Though SBI had to accept haircuts on some loans, it succeeded in recovering substantial amounts through resolution and asset sales.

At the same time, SBI strengthened its credit appraisal systems, improved post-loan monitoring, and reduced exposure to high-risk sectors. Weak loans were written off, balance sheets were cleaned, and risk management practices were tightened.

By 2022–2024, SBI’s efforts began to show results. Gross and Net NPAs declined steadily, profitability improved, and the bank regained stability. What once appeared as a crisis became a learning phase that reshaped SBI’s lending culture.

Questions

1.      Define Non-Performing Assets (NPA).                             (3Marks)
Explain when a loan account is classified as an NPA with reference to the SBI case.

2.       Identify any two major causes for the rise in NPAs in State Bank of India. (3 Marks)
Explain briefly using examples from the case.

3.      Discuss the corrective measures adopted by State Bank of India to reduce NPAs. (2 Marks)

4.      Explain the role of the Insolvency and Bankruptcy Code (IBC) and improved credit appraisal. (2 Marks)