₹2 Lakh Crore In Profits: The PSU Banks’ Comeback

Not too long ago, PSU banks were often associated with high bad loans and weak profitability.

Today, the picture looks very different.

Public sector banks have improved their balance sheets, reduced bad loans, reported record profits and expanded their lending business.

The market has taken notice too.

In 2025, the Nifty PSU Bank Index gained 26 per cent, outperforming both the Nifty Bank Index, which returned 16 per cent, and the Nifty 50, which gained 9.5 per cent. Public sector banks, or PSU banks, are banks where the government owns more than 51 per cent. They play an important role in India's financial system by lending to sectors such as infrastructure, agriculture, MSMEs and public projects.

India currently has 12 public sector banks. State Bank of India is the largest, followed by Bank of Baroda and Punjab National Bank.

While these banks vary in size, the bigger story is how the sector's financial health has improved over the past few years.

One of the biggest changes has been the growth in deposits and lending.

Deposits increased from ₹88.35 lakh crore in 2015 to ₹231.90 lakh crore in 2025. During the same period, total credit grew from ₹66.91 lakh crore to ₹181.34 lakh crore.

Deposits are the primary source of funds for banks, while lending is how they generate income.

Growth in both suggests that PSU banks are attracting more customers and deploying more capital across the economy.

This also reflects stronger demand for banking services and improved business activity.

Asset quality has also improved significantly.

The gross NPA ratio declined from 9.11 per cent in March 2021 to 1.93 per cent in March 2026.

In simple terms, banks now have far fewer bad loans on their books.

Lower NPAs reduce the need for large provisions, strengthen balance sheets and leave banks with more capital to lend. This has also improved investor confidence in the sector.

As asset quality improved, profits also moved higher.

Net profit increased from ₹66,543 crore in FY22 to ₹1,98,210 crore in FY26.

Stronger profitability also gives banks more flexibility to expand operations, improve capital buffers and reward shareholders.

The improvement in deposits, lending and asset quality has also helped expand the overall scale of banking operations.

Total business, which includes deposits and advances, increased from ₹181.5 lakh crore in FY22 to ₹283.3 lakh crore in FY26.

This steady expansion indicates that PSU banks have been growing on both sides of their balance sheet.

This also means that a larger business base can support higher earnings, provided asset quality remains stable.

The stronger fundamentals have also been reflected in stock performance.

Indian Bank emerged as the best-performing PSU bank in FY26, with its stock rising 57 per cent. Canara Bank returned 39 per cent, followed by Bank of Maharashtra (33 per cent), Union Bank of India (31 per cent), Bank of India (29 per cent) and SBI (27 per cent).

Investors rewarded the sector as financial performance continued to improve.

The turnaround has been impressive, but the story does not end here.

Investors should continue to watch a few key risks.

Asset quality remains an important metric because credit cycles can reverse and push NPAs higher.

Interest rate cuts can put pressure on lending margins and affect profitability.

Valuations have also become richer after the strong rally in 2025. Government ownership can influence lending decisions, while private sector banks and NBFCs continue to compete aggressively.

The broader picture, however, is very different from what it was a few years ago.

Lower NPAs, rising profits and expanding business have brought PSU banks back into focus.

Going forward, sustained earnings growth, stable asset quality and valuation comfort will be the key factors to watch.

Sources:

• Economic Times
  
• Clear Tax
  
• PIB
  
• PIB
  
• Economic Times