Public Sector Banks Overcome Bad Loans to Propel Growth

Public sector banks in India have achieved a remarkable turnaround, reporting a staggering 26% increase in profits, reaching Rs 1.83 lakh crore in FY25. This growth comes as part of a broader trend in the banking sector, which saw overall earnings soar nearly 14-fold over the past decade to Rs 3.71 lakh crore. The surge in profits is attributed to increased lending income, treasury gains, and a reduction in provisions for non-performing assets (NPAs). While government-owned banks are closing the gap with private banks, which reported a modest 7% growth to Rs 1.87 lakh crore, the financial landscape is shifting significantly.

Record Profits for Public Sector Banks

The financial performance of public sector banks has been nothing short of extraordinary. In FY25, these banks collectively recorded profits of Rs 1.83 lakh crore, marking a significant recovery from previous years. The State Bank of India (SBI) emerged as the most profitable bank, posting net earnings of Rs 70,900 crore. Following closely were HDFC Bank and ICICI Bank, with profits of Rs 67,347 crore and Rs 47,227 crore, respectively. This growth trajectory is a stark contrast to the challenges faced in earlier years, where public sector banks struggled with high levels of bad loans and substantial losses.

The turnaround can be traced back to a comprehensive cleanup initiative that began in 2015, spearheaded by former Reserve Bank of India Governor Raghuram Rajan. This initiative included an asset quality review (AQR) that forced banks to confront their non-performing loans. As a result, public sector banks faced significant losses over three consecutive years, with NPAs exceeding 8% of advances in FY16. However, the recent financial results indicate that these institutions have successfully navigated through their challenges.

Government Support and Strategic Changes

To bolster the growth of public sector banks, the Indian government injected a substantial capital of Rs 3.15 lakh crore since the AQR implementation. This financial support has played a crucial role in stabilizing these banks and enhancing their operational capabilities. According to a report by Motilal Oswal Finance Services, banks are now prioritizing asset quality over aggressive growth. They are implementing stricter credit filters and higher thresholds for credit scores, particularly in retail lending.

The banking sector’s recovery is also attributed to a stable credit growth observed in FY25, building on the positive trends from FY24. The aggregate net profit of all commercial banks reached Rs 3.19 lakh crore in the previous year, showcasing the sector’s resilience. Analysts have noted that while there were initial concerns regarding deposits lagging behind credit growth, this gap has since closed as the year progressed.

Impact of Regulatory Changes

The implementation of the AQR has led to a more rigorous recognition of non-performing loans and increased provisions for potential losses. Additionally, the introduction of the Insolvency and Bankruptcy Code has strengthened banks’ recovery mechanisms, allowing them to negotiate more effectively with defaulters. Recent statistics indicate that creditors have successfully recovered approximately Rs 3.9 lakh crore across 1,194 cases through March 2025.

As of March 31, 2025, gross NPAs have stabilized at 2.4%, with projections suggesting they will remain within the range of 2.4% to 2.6% by March 2026. Experts believe that corporate NPAs will remain low due to improved risk management practices among banks and the robust financial health of corporate borrowers.

Future Outlook and Challenges

Looking ahead, analysts are cautiously optimistic about the banking sector’s prospects. Vishal Narnolia, an analyst at ICICI Direct, has indicated that net interest margins (NIMs) may experience a slight decline in the first half of FY26 due to anticipated policy rate cuts. However, he expects that deposit repricing in the latter half of the fiscal year will support margin recovery.

Despite the positive outlook, there are concerns regarding rising delinquencies in unsecured loans and credit cards, as well as stress in the microfinance segment. These factors could potentially moderate profit growth in FY26. Overall, while public sector banks have made significant strides in their financial performance, they must remain vigilant in managing risks and adapting to changing market conditions.

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