MUMBAI, February 2026 — Indian banks are racing to scrub their balance sheets clean, but the cost of this “hygiene” is becoming painfully clear. In a desperate bid to offload toxic retail debt, financial institutions are selling off record volumes of non-performing assets (NPAs), only to find that the actual value of these loans is evaporating.

The Massive Debt Dump

The December quarter of 2025 saw a staggering surge in activity. Banks offloaded a massive ₹24,814 crore in retail NPAs to Asset Reconstruction Companies (ARCs). To put that in perspective, this is a more than two-fold jump from the ₹9,933 crore transacted just three months prior.

While banks might celebrate “cleaner” books, the underlying reality suggests a fire sale. What was once a steady stream of manageable bad debt has turned into a flood that the system is struggling to absorb.

The 15% Reality Check

The most alarming metric isn’t the volume of debt being sold, but how little it’s actually worth. For the ₹24,814 crore in loans offloaded, ARCs issued security receipts totaling only ₹3,774 crore.

This implies a recovery rate of just 15%.

Just one quarter ago, the recovery rate stood at a much healthier 34%. This vertical drop suggests that either the quality of retail loans is deteriorating at lightning speed, or ARCs—the very firms meant to fix the problem—are overestimating their ability to squeeze blood from a stone.

Unsecured Loans: The Ticking Time Bomb

For years, retail loans were seen as the “safe” alternative to volatile corporate debt. That illusion is breaking. Fitch Ratings has raised the alarm over increasing stress in unsecured retail portfolios.

The danger is a “cascading effect.” Data shows that half of these defaulting borrowers also hold secured loans (like home or car loans). When the unsecured “small” loan fails, it often acts as a lead domino, threatening the borrower’s entire financial stability and, by extension, the bank’s secured portfolio.

Volume Over Value?

Critics and analysts are now questioning the strategy of “aggressive deleveraging.” By focusing on moving massive volumes of debt off the books to please shareholders, banks may be ignoring a grim reality: the recovery market is saturated.

With the total value of NPAs held by ARCs reaching ₹9.7 trillion, the focus has shifted from realistic valuation to sheer optics. As ARCs continue to buy these “bad” assets, they risk overpaying for debt that may never be recovered, potentially shifting the crisis from the banks’ books to the ARCs’ balance sheets.

Bottom Line

The surge in bad loan sales isn’t necessarily a sign of a healthy cleanup—it’s a sign of a system trying to outrun rising defaults. With recovery rates hitting a record low of 15%, the “retail boom” of previous years is leaving behind a trail of toxic debt that no amount of accounting maneuvers can fully hide.