Non-Performing Assets (NPAs) remain one of the most critical challenges confronting India’s Regional Rural Banks (RRBs). Despite their mandate of promoting financial inclusion and rural development, high NPAs have consistently undermined their operational efficiency, profitability, and sustainability. This paper provides a comparative analysis of NPAs in RRBs across Rajasthan and Gujarat for the period 2014–2023, adopting a mixed-methods approach that integrates quantitative data from secondary sources with qualitative insights from field-based interviews and borrower surveys. Key indicators such as Gross and Net NPA ratios, Provisioning Coverage Ratio (PCR), Capital Adequacy Ratio (CAR), and recovery performance across different mechanisms are examined. The study reveals that Rajasthan RRBs exhibited persistently higher NPAs, with peaks coinciding with agricultural distress, whereas Gujarat RRBs benefitted from more diversified portfolios and digital repayment adoption. Recovery performance also varied: Rajasthan relied more on compromise settlements, while Gujarat showed stronger outcomes through SHG/JLG linkages and SARFAESI proceedings. Primary data findings highlight structural barriers such as limited managerial capacity, high borrower dependence on monsoon cycles, and inadequate credit monitoring. The analysis suggests that sustainable solutions require context-specific recovery strategies, improved provisioning norms, and greater digital and institutional innovations. The paper contributes to policy debates on strengthening rural credit delivery, balancing developmental mandates with financial stability, and aligning RRB operations with the evolving rural economy.