In the broad context of financial globalisation and the fiscal austerity associated with the neoliberal regime, the emergence of the bad loans crisis, as measured by non-performing assets (NPAs), in the Indian banking sector in the post-reform period has raised significant concerns about financial stability and economic growth. The cause of the bad loans in the post-reform period has generated much debate and research among academics and policymakers. However, a comprehensive study on the political economy of the cause and consequences of the persistence of Indian banks’ bad loans in the post-liberalisation period remains absent from the literature. This study aims to address this research gap. The complex dynamics of state and private capital are studied to explain the persistence of bad loans. Furthermore, it is argued that delayed resolution of the bad loan crisis may serve as a precursor to the large-scale privatisation of public sector banks.