1) Why is a 10% fall in bad loans significant?

Bad loans are largely loans that haven’t been repaid for 90 days or more. For the first time in years, bad loans of public sector banks have shrunk year-on-year. For years, they did not recognize bad loans, and postponed recognition by restructuring loans and also by evergreening. It was only in 2013-2014 that these banks started recognizing a few bad loans. This changed further in mid-2015, when RBI launched an asset quality review, following it up with other schemes that forced banks to recognize bad loans. That is why bad loans jumped from ₹2.27 trillion to ₹8.96 trillion between March 2014 and March 2018.

2) Why have bad loans shrunk between March 2018 and March 2019?

Loans that have been bad for four years are dropped from the balance sheet of banks by way of a write-off. This is referred to as a technical write-off and is basically an accounting practice. The central bank defines technical write-offs as bad loans that have been written off at the head office level of the bank but remain as bad loans on the books of branches and, hence, recovery efforts continue at the branch level. A lot of technical write-offs has happened between March 2018 and March 2019, leading to bad loans coming down during that period.