Public Sector Banks (PSBs): A Resilient Force Driving India’s Economic Growth
Public Sector Banks (PSBs) in India have made an impressive recovery, marking a significant milestone in the country’s financial sector. For the financial year 2023-24, PSBs have recorded their highest-ever aggregate net profit of ₹1.41 lakh crore, reflecting a robust turnaround. This remarkable performance is primarily driven by the improvement in asset quality, as evidenced by a sharp decline in the Gross Non-Performing Assets (GNPA) ratio, which fell to 3.12% in September 2024, compared to a peak of 14.58% in March 2018. Alongside these financial achievements, PSBs have significantly contributed to shareholder returns, paying a total dividend of ₹61,964 crore over the past three years.
The Decline in GNPA: Strengthening the Resilience of PSBs
A notable aspect of the PSB resurgence has been the decline in the GNPA ratio, which has steadily decreased from a troubling 14.58% in March 2018 to 3.12% by September 2024. This substantial reduction can be attributed to the proactive measures and reforms implemented by both the Government of India and the Reserve Bank of India (RBI). The pivotal moment came in 2015 with the RBI’s initiation of the Asset Quality Review (AQR), which led to a comprehensive identification and transparent recognition of NPAs. This process not only unearthed hidden stress in the banking system but also led to the reclassification of previously restructured loans as NPAs.
Additionally, the Government introduced the 4R strategy — Recognition, Recapitalization, Resolution, and Reform — aimed at strengthening the PSBs and addressing the challenges posed by NPAs. This strategic approach has significantly improved the asset quality and risk management frameworks within these banks.
Improved Capital Adequacy and Resilience
Another key indicator of the improved health of PSBs is their Capital to Risk (Weighted) Assets Ratio (CRAR), which has risen by 3983 basis points to 15.43% in September 2024, compared to 11.45% in March 2015. This surge in the CRAR reflects a fortified capital base, enhancing the capacity of PSBs to support economic growth and absorb shocks. This improvement in capital adequacy also exceeds the RBI’s minimum CRAR requirement of 11.5%, underlining the financial resilience of these institutions.
Expanding Financial Inclusion and Social Impact
Beyond their financial achievements, PSBs have played a crucial role in fostering financial inclusion in India. They have extended banking services to underserved populations, ensuring access to credit, insurance, and pensions. PSBs have been instrumental in implementing key government schemes such as the Atal Pension Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana, benefiting millions of citizens.
Key initiatives aimed at expanding financial inclusion include the opening of over 54 crore Jan Dhan accounts and sanctioning more than 52 crore collateral-free loans under various government-backed schemes like PM Mudra, Stand-Up India, and PM-SVANidhi. The number of PSB branches has increased significantly, from 1,17,990 in March 2014 to 1,60,501 in September 2024, with a substantial presence in rural and semi-urban areas. These efforts have ensured that financial services reach the remotest corners of India.
Supporting the MSME Sector
The MSME (Micro, Small, and Medium Enterprises) sector, which is a cornerstone of India’s economic growth, has received substantial support from PSBs. The banks have provided credit to MSMEs at affordable rates, with MSME advances growing at a compound annual growth rate (CAGR) of 15% over the past three years. As of March 31, 2024, total MSME advances amounted to ₹28.04 lakh crore, marking an annual growth rate of 17.2%.
Strengthening PSBs Through the EASE Framework
The government has also introduced the Enhanced Access & Service Excellence (EASE) framework, which focuses on institutionalizing incremental reforms in PSBs. This framework emphasizes improving governance, prudent lending practices, risk management, technology adoption, and human resource development. It aims to further strengthen the financial health of PSBs and enhance their operational efficiency.
Conclusion
Public Sector Banks in India have demonstrated remarkable resilience, bouncing back from a period of significant stress to achieve unprecedented financial milestones. Their success in reducing NPAs and improving capital adequacy underscores the sector’s strong risk management capabilities. Furthermore, PSBs have played a pivotal role in promoting financial inclusion and supporting key sectors of the economy, including MSMEs. With continued government support and reforms such as the EASE framework, PSBs are well-positioned to drive India’s economic growth and contribute to the nation’s development agenda. The future looks promising for PSBs as they continue to evolve, adapt, and strengthen their role in India’s banking ecosystem.
