Mumbai: Five years after being floated, India’s bad bank framework is set for a structural change, with plans underway to merge the National Asset Reconstruction Co (NARCL) and India Debt Resolution Co (IDRCL), people familiar with the matter told ET.

The proposal, backed by shareholders after internal reviews, seeks to combine the asset acquisition and resolution functions currently split between the two entities. The merger is expected to take six to nine months, subject to regulatory and tribunal approvals, sources said.

The twin-entity structure was created in 2022 to accelerate clean-up of large bad loans, with NARCL acquiring stressed assets and IDRCL handling their resolution. The framework was introduced after a prolonged banking sector stress cycle that saw gross non-performing assets peak at about 16% in March 2018 before easing to 2.3% by March 2025, helped by write-offs, recoveries, and regulatory interventions.

By offloading large stressed accounts, those above ₹500 crore, banks were able to free up capital and management bandwidth, allowing a return to core lending activity while a specialised platform focused on resolution.

At inception, the government had identified about ₹2 lakh crore of legacy loans for transfer to NARCL. Of this, ₹1.63 lakh crore had been acquired as of December 2025. The structure involves a 15% upfront cash payment, with the remainder issued as security receipts (SRs) and largely retained by selling banks.

NARCL has utilised roughly ₹22,000-23,000 crore of the ₹30,600 crore sovereign guarantee that backstops security receipts, leaving room for further transactions. Some large accounts, including VOVL, are likely to spill over into the next financial year due to procedural delays. Progress on recoveries has been gradual. It has fully resolved a handful of accounts, including SSA International, Helios Photovoltaic, Wind World and Matenere, while making partial recoveries in others. As of December-end, it had redeemed SRs worth ₹3,871 crore, translating into a cumulative recovery ratio of about 13.7%.

The proposed merger is expected to streamline governance, leading to leadership consolidation and board-level changes, said sources. The move follows feedback from stakeholders seeking better efficiency after operational frictions in the dual-entity model. As NARCL’s operations are still in their early stages, its earnings profile is yet to stabilise. Timely and effective resolution of stressed assets will be essential to unlock returns and will also drive profitability through upside gains and recovery incentives, Crisil ratings had said in a recent note.

Financial performance has been volatile. NARCL had reported profit after tax of ₹424 crore in FY25, with return on assets at 9.9%, largely driven by unrealised fair value gains of ₹343 crore, including ₹254 crore from a single account. However, earnings normalised in the first half of FY26, with profit at ₹125 crore and annualised return on assets moderating to 4.4%.