The Indian banking sector has witnessed a remarkable transformation over the past decade, with Public Sector Banks (PSBs) at the forefront of this evolution. From grappling with high levels of non-performing assets to achieving record-breaking profitability, PSBs have undergone significant reforms driven by targeted government initiatives and strategic measures. This turnaround highlights the sector’s resilience, operational efficiency, and growing role in India’s economic development. As the backbone of financial inclusion and economic support, PSBs have demonstrated their commitment to fostering equitable growth and long-term stability.
Significant Improvement in Asset Quality
The Indian banking sector has undergone a transformative journey in the past decade, with Public Sector Banks (PSBs) achieving remarkable progress in reducing their Gross Non-Performing Assets (GNPA) and strengthening their financial resilience. From a peak GNPA ratio of 14.58 per cent in March 2018 to an impressive 3.12 per cent in September 2024, PSBs have demonstrated significant improvements driven by targeted reforms and government initiatives.
Record-Breaking Profitability
Public Sector Banks (PSBs) in India have achieved an unprecedented milestone by recording their highest-ever aggregate net profit of Rs1.41 lakh crore in the financial year 2023-24. This remarkable performance highlights a robust turnaround for the sector, driven primarily by significant improvements in asset quality. The Gross Non-Performing Assets (GNPA) ratio has seen a steep decline, falling to just 3.12 per cent as of September 2024, signaling better credit management and recovery mechanisms. This achievement underscores the growing strength and resilience of PSBs in the Indian banking landscape.
Commitment to Shareholders and Stakeholders
The upward trajectory continued in the first half of the financial year 2024-25, with PSBs registering a net profit of Rs 85,520 crore. This sustained profitability is a testament to the sector’s operational efficiency, prudent risk management practices, and a stronger capital base. Alongside their financial performance, PSBs have rewarded shareholders generously, distributing a total dividend of Rs 61,964 crore over the past three years. This reflects their commitment to delivering value to stakeholders while maintaining long-term financial stability.
Key Contributors to India’s Economic Growth
The stellar performance of PSBs highlights their evolving role as vital contributors to India’s economic development. With improved asset quality, a stronger capital base, and sustained profitability, these banks are well-positioned to support the nation’s developmental agenda. Their strategic evolution enhances their competitive edge in the financial sector, reinforcing their role as the backbone of India’s economic growth and financial stability.
Financial Performance and Turnaround
Public Sector Banks (PSBs) in India have achieved an extraordinary milestone by recording their highest-ever aggregate net profit of Rs1.41 lakh crore in the financial year 2023-24. This achievement marks a significant turnaround for the sector, driven by substantial improvements in asset quality. The Gross Non-Performing Assets (GNPA) ratio declined steeply to 3.12 per cent in September 2024, reflecting enhanced operational efficiency and prudent risk management. Continuing their strong performance, PSBs registered a net profit of Rs 85,520 crore in the first half of 2024-25, highlighting sustained momentum and financial resilience. Over the past three years, they have also prioritized shareholder returns, paying a cumulative dividend of Rs 61,964 crore, further reinforcing investor confidence.
Role in Financial Inclusion
Beyond their stellar financial achievements, PSBs have played a critical role in advancing financial inclusion. By implementing key government schemes such as the Atal Pension Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana, they have ensured that essential financial benefits reach underserved and marginalized communities. These initiatives have not only enhanced accessibility to financial services but also contributed to empowering vulnerable sections of society, fostering greater inclusivity and social equity.
Support from Government Reforms
The impressive performance of PSBs has been bolstered by the government of India’s strategic reforms and supportive policies. Measures aimed at strengthening the banking system have fostered greater transparency, operational stability, and accountability. Enhanced governance frameworks, recapitalization efforts, and a focus on digital transformation have collectively enabled PSBs to achieve this unprecedented growth. This collaborative approach between the government and the banking sector has not only stabilized the system but also positioned PSBs as key drivers of India’s economic growth and social development.
Asset Quality Review (AQR): A Turning Point
The Reserve Bank of India’s (RBI) Asset Quality Review (AQR) in 2015 marked a pivotal moment for India’s banking sector. The AQR mandated transparent recognition of stressed assets and reclassified previously restructured loans as NPAs. This exercise exposed hidden stress within banks, leading to a sharp increase in reported NPAs. While the stringent provisioning requirements during this phase temporarily impacted the financial metrics of PSBs, it laid the foundation for long-term stability by ensuring accountability and transparency.
The 4R’s Strategy: A Comprehensive Approach
The Government of India introduced a robust 4R’s strategy to address the challenges posed by high NPAs and to rejuvenate PSBs:
1. Recognising NPAs Transparently: Ensuring accurate identification of stressed assets to address them effectively.
2. Resolution and Recovery: Leveraging legal frameworks and targeted measures to resolve and recover NPAs.
3. Recapitalisation: Infusing capital into PSBs to bolster their financial position and lending capacity.
4. Reforms: Introducing governance and operational reforms to enhance efficiency, accountability, and resilience.
Capital Adequacy and Improved Resilience
An important indicator of PSBs’ enhanced resilience is the sharp rise in their Capital to Risk (Weighted) Assets Ratio (CRAR). From 11.45% in March 2015 to 15.43 per cent in September 2024, the improvement reflects sustained efforts to strengthen the capital base of PSBs. This CRAR far exceeds the RBI’s minimum requirement of 11.5%, highlighting the robustness and stability of these banks.
Supporting Economic Growth
The significant reduction in GNPA levels and strengthened financial health have positioned PSBs to play a more effective role in driving economic growth. With higher capital adequacy and reduced stress on their balance sheets, these institutions are now better equipped to extend credit and support productive sectors of the economy.
Expanding Financial Inclusion Through PSBs
Public Sector Banks (PSBs) in India have played a pivotal role in promoting financial inclusion, making banking services accessible to the masses, particularly in underserved and rural areas. With a robust capital foundation and improved asset quality, PSBs have significantly reduced their reliance on government support for capital infusion. This strengthened position has enabled them to independently access financial markets and expand their reach. As of September 2024, these efforts have led to the creation of 54 crore Jan Dhan accounts and the sanctioning of over 52 crore collateral-free loans under flagship schemes like PM Mudra, Stand-Up India, PM-SVANidhi, and PM Vishwakarma, empowering millions of individuals and micro-entrepreneurs.
Expanding Bank Infrastructure
The banking network has witnessed remarkable growth in recent years. The number of bank branches has increased from 1,17,990 in March 2014 to 1,60,501 by September 2024. Of these, a significant 1,00,686 branches cater to Rural and Semi-Urban (RUSU) areas, ensuring that financial services reach the grassroots level. This expansion underscores the commitment of PSBs and Scheduled Commercial Banks (SCBs) to bridge the urban-rural divide and drive economic empowerment in the hinterlands.
Support for Farmers through Kisan Credit Card Scheme
The Kisan Credit Card (KCC) Scheme continues to be a cornerstone of financial support for India’s agricultural sector. As of September 2024, there are 7.71 crore active KCC accounts with a total outstanding credit of ₹9.88 lakh crore. This scheme provides farmers with access to short-term credit for crop production, enabling them to meet their financial needs and improve productivity. The KCC initiative not only enhances credit availability for farmers but also contributes significantly to the goal of rural development and agricultural growth.
MSME Sector Growth and Credit Expansion
The Government of India (GoI) has consistently prioritized the growth and development of the Micro, Small, and Medium Enterprises (MSME) sector by facilitating access to affordable credit. Through various targeted initiatives, the sector has witnessed a robust expansion in financial support. MSME advances have recorded a Compound Annual Growth Rate (CAGR) of 15 per cent over the past three years. As of March 31, 2024, the total advances to this sector stood at an impressive Rs 28.04 lakh crore, marking an annual growth of 17.2 per cent. This substantial growth underscores the critical role of MSMEs in driving the nation’s economic resilience and employment generation.
Rising Advances of Scheduled Commercial Banks
In parallel, the gross advances of Scheduled Commercial Banks have also seen remarkable expansion over the years. Between 2004 and 2014, the total advances grew from Rs 8.5 lakh crore to Rs 61 lakh crore. This trajectory has further accelerated, with the total advances reaching Rs 175 lakh crore by March 2024. This exponential growth reflects the increasing credit demand across various sectors of the economy, backed by favourable policies and reforms aimed at enhancing financial inclusion and capital accessibility.
EASE Framework: Enhancing Public Sector Bank Efficiency
The Government of India has implemented the Enhanced Access & Service Excellence (EASE) framework to strengthen the financial health and operational efficiency of Public Sector Banks (PSBs). This structured approach focuses on reforming governance, improving risk management, and leveraging technology to drive operational and service excellence. EASE promotes the adoption of data-driven decision-making and outcome-oriented practices to ensure sustainable growth and improve customer experiences in the banking ecosystem.
Prudential Lending: Strengthening Credit Quality and Risk Management
One key pillar of the EASE framework is Prudential Lending, aimed at improving credit quality and risk management. PSBs now employ robust data-driven risk-scoring mechanisms to evaluate high-value loans. This approach includes factoring in group entity risks, ensuring adherence to risk-based pricing, and minimizing exposure to vulnerable credit areas. These measures collectively contribute to healthier loan portfolios and reduced non-performing assets (NPAs).
IT-Based Early Warning Systems for Risk Mitigation
The introduction of IT-based Early Warning Systems has further fortified the risk management processes in PSBs. These systems utilize third-party data to identify early signs of stress in borrower accounts, enabling timely intervention and mitigating potential defaults. Coupled with the establishment of Stressed Assets Management Verticals, PSBs have streamlined their efforts toward slippage prevention and recovery, particularly in large-value loans. This targeted approach has led to a significant reduction in stressed assets and improved financial stability.
Tech-Enabled Smart Banking for Operational Excellence
In addition, the EASE framework emphasizes Tech-Enabled Smart Banking to enhance operational efficiency and customer satisfaction. Advanced retail and MSME loan management systems have reduced loan processing turnaround times, while platforms like the One-Time Settlement (OTS) mechanism and the e-Bkray stressed assets auction platform have facilitated quicker and more effective recoveries. By integrating these technological solutions, PSBs are better equipped to cater to customer needs while maintaining operational resilience.
Reforms in the Banking Sector
Over the past decade, the Government of India has implemented extensive reforms to strengthen the banking ecosystem, focusing on financial stability, transparency, and inclusivity. A cornerstone of this effort has been the adoption of the 4R’s strategy: Recognising NPAs transparently, Resolution and Recovery, Recapitalisation of Public Sector Banks (PSBs), and comprehensive reforms. These measures have significantly improved the financial health of PSBs, enabling them to achieve record profitability, enhanced capital adequacy, and reduced NPAs. The Gross NPA ratio of PSBs declined dramatically from a peak of 14.58% in March 2018 to 3.12% in September 2024, signaling enhanced asset quality and risk management practices.
Enhanced Performance of PSBs
PSBs have demonstrated remarkable growth and resilience in recent years. In FY 2023-24, they achieved their highest-ever aggregate net profit of ₹1.41 lakh crore, a significant increase from ₹1.05 lakh crore in FY 2022-23. Their improved financial position has reduced dependency on government recapitalization, allowing them to raise capital independently. PSBs have also played a pivotal role in promoting financial inclusion, with over 1,00,686 branches located in rural and semi-urban areas, supporting flagship schemes like PM Mudra Yojana and PM-SVANidhi. These initiatives have particularly empowered women, with 68% of Mudra loan beneficiaries being women entrepreneurs.
Growth in Credit and Advances
The gross advances of Scheduled Commercial Banks (SCBs) have seen exponential growth, increasing to Rs 175 lakh crore in March 2024. A significant portion of these advances supports key sectors like MSMEs, which registered a Compound Annual Growth Rate (CAGR) of 15 per cent over the past three years. The Kisan Credit Card (KCC) scheme has also been instrumental in providing short-term crop loans, with outstanding credit reaching Rs 9.88 lakh crore across 7.71 crore operative accounts as of September 2024.
Employee-Centric HR Policies
The Government has prioritized employee welfare in PSBs, introducing several progressive HR measures. Policies now ensure greater transparency in transfers, especially for women employees, by considering factors like marital status, maternity, and caregiving responsibilities. Automation of transfers and the provision of location preferences further enhance employee satisfaction. Additionally, under the 12th Bipartite Settlement, bank employees received a 17 per cent salary hike, updated allowances, and special leave provisions for women.
Welfare Measures for Employees and Pensioners
The welfare of both current employees and retirees has been a focus area. Initiatives include revised ex-gratia amounts for pensioners, enhanced DA neutralization for pre-2002 retirees, and an extension of pension options to bank resignees. The Staff Welfare Fund ceiling has also been significantly increased, benefiting approximately 15 lakh employees and retirees. These measures underscore the commitment to ensuring financial security and well-being for all stakeholders in the banking sector.
These reforms collectively highlight the Government’s commitment to fostering a robust and inclusive banking system while enhancing employee satisfaction and public trust.
Strengthening the Financial Condition of Public Sector Banks (PSBs)
The Government has undertaken several measures to enhance the financial condition of Public Sector Banks (PSBs). One of the key frameworks introduced is the Enhanced Access & Service Excellence (EASE), which focuses on continuous reforms in governance, prudential lending, risk management, and the integration of technology-driven solutions. This framework aims to create systemic improvements and reduce the likelihood of recurrence of excessive stress in PSBs. Notable steps under EASE include the adoption of risk-based pricing for loans, data-driven risk-scoring, early warning systems for stressed accounts, and the establishment of specialized verticals for stressed asset management.
Adoption of Technology and Smart Banking
PSBs have made significant strides in adopting technology to streamline their operations. Retail and MSME Loan Management Systems have been introduced to reduce loan turnaround times, improving overall efficiency. Furthermore, online platforms such as OTS and e-Bक्रय for stressed asset auctions have been implemented, which have led to improved recovery rates. These tech-enabled solutions have contributed significantly to the banks’ ability to manage assets more effectively and cater to a wider customer base.
Strengthening Governance in PSBs
Governance reforms in PSBs have focused on ensuring that top management selections are carried out through an independent process. The introduction of non-executive chairmen in nationalized banks and the widening of the talent pool for leadership positions have strengthened decision-making processes. Performance-based extensions for Managing Directors and thorough appraisal systems by boards have also been implemented, enhancing the accountability and efficiency of the management. The active role of Non-Official Directors (NODs) has further bolstered the governance structure.
Impact of Mergers on Financial Strength
The consolidation of PSBs through mergers has resulted in significant financial improvements. Key financial ratios such as Capital Adequacy Ratio (CRAR), CET1 Capital Ratio, Gross Non-Performing Asset (GNPA) Ratio, and Return on Assets (RoA) have shown marked improvement across merged banks. For example, Punjab National Bank’s GNPA ratio improved from 13.79% to 4.48%, while the RoA shifted from -0.66% to 0.94%. These positive outcomes indicate that mergers have facilitated better synergies, economies of scale, and technology integration, all contributing to the overall strengthening of the financial health of the banks.
Promoting Financial Inclusion and Economic Growth
The consolidation of PSBs has not only enhanced their financial health but also expanded their reach. The merging of banks has facilitated geographical diversification, allowing PSBs to tap into previously inaccessible markets. This broader network has enabled PSBs to provide financial services to underserved regions, promoting financial inclusion and stimulating economic growth. By extending their customer base, particularly in remote areas, PSBs are contributing to the upliftment of local economies and encouraging the development of previously underbanked areas.
The transformation of India’s Public Sector Banks is a testament to the efficacy of targeted reforms, strategic government support, and enhanced operational practices. By achieving record profitability, improving asset quality, and expanding financial inclusion, PSBs have solidified their role as key contributors to India’s economic growth. With a robust capital base and a focus on technological advancement, these banks are well-positioned to support the nation’s developmental aspirations while maintaining financial resilience and sustainabilit
Leave a Comment