How India’s Public Banks Rewrote Their Story: Inside the ₹1.98 Lakh Crore Comeback

Introduction

In FY18, India’s public-sector banks stood at the centre of a severe balance-sheet crisis, burdened by rising bad loans, heavy provisioning and an aggregate loss of ₹85,370 crore. By FY26, the picture had changed dramatically: gross and net NPA ratios had declined to 1.93% and 0.39%, respectively, while aggregate profit reached ₹1.98 lakh crore.

This turnaround was neither sudden nor driven by a single favourable cycle. It emerged from years of transparent stress recognition, stronger recovery mechanisms, recapitalisation, consolidation and operating reforms. The journey offers a compelling case study of how disciplined institutional repair can restore lending capacity, profitability and investor confidence.

The Framework Behind The Turnaround Of PSBs

The four pillars behind the PSU-bank turnaround. (Source: Reserve Bank of India)

1. Recognition
   • Recognition came first because the problem cannot be addressed until it is measured correctly. Stressed accounts entered reported asset-quality numbers, making the damage explicit.
   • Regulatory forbearance and restructuring flexibility had postponed the full recognition of troubled loans. By March 2015, standard restructured assets at PSBs had reached 7%. That fell to 0.52% by March 2019 as banks brought more stress into the open. The clean-up was painful.
   • Gross NPAs peaked at ₹8.96 lakh crore in March 2018, or 14.58% of gross advances. Provisions and credit losses pushed the PSBs to an aggregate loss of roughly ₹85,370 crore in FY18 and pressured equity capital. But recognition replaced uncertainty with a clearer picture of the problem and gave the recovery a credible starting point.
2. Resolution & Recovery
   • Resolution and recovery strengthened lenders’ options through the Insolvency and Bankruptcy Code, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002(SARFAESI) and the Recovery of Debts and Bankruptcy Act. Under the insolvency framework, control of a defaulting company could move away from existing promoters, while wilful defaulters and certain connected persons were restricted from the resolution process.
3. Recapitalisation
   • From October 2017, the government infused ₹2.7 lakh crore into PSBs, while the banks raised another ₹1.63 lakh crore up to December 2020. This rebuilt buffers after recognition-driven losses.
   • The government has reduced the total number of PSU banks from 27 in FY18 to 12 in FY26.  The aim was larger balance sheets, stronger risk management, wider branch networks, better efficiency and greater ability to compete. Mergers gave the institutions more scale to modernise and grow.
4. Reforms
   • The government introduced the Enhanced Access & Service Excellence (EASE) framework to make the PSBs competitive enough and make them better institutions.
   • The EASE framework focused on governance, board effectiveness, underwriting, loan-management systems, early-warning mechanisms, specialised monitoring of stressed assets, digital lending and customer experience.
   • In simple words, the aim was no longer only to clean up old mistakes. It was also to spot fresh stress earlier, make better lending decisions and run the banks more effectively.

The Turnaround Visible Through The Numbers (Asset Quality)

Source: Reserve Bank of India

Nifty PSU Bank Outperforms Key Indices

Source: NSE Website

• Ultimately, the PSU-bank revival translated into market outperformance. Between 1 April 2018 and 31 March 2026, the Nifty PSU Bank Index delivered a 13.39% return, ahead of the Nifty 50 at 10.4%, Nifty Bank at 9.53%, and Nifty Private Bank at 7.35%.
• As losses turned into record profits, NPAs declined sharply, and lending capacity expanded, investor perception also changed. The journey from being the weakest link in the banking system to outperforming the broader market captures the real scale of the turnaround.

The Revival Is Proven: Durability Is The Next Test

• India’s PSU banks have travelled from deep balance-sheet stress in FY18 to stronger profitability, cleaner assets and renewed lending capacity by FY26. The turnaround was built through the 4R framework—recognition, resolution and recovery, recapitalisation, and reforms—supported by consolidation and improved operating practices. Aggregate losses of ₹85,370 crore in FY18 turned into profits of ₹1.98 lakh crore in FY26, while gross and net NPA ratios declined to 1.93% and 0.39%, respectively.
• This improvement also supported the Nifty PSU Bank Index’s outperformance against major market and banking benchmarks. However, the repair phase is now largely behind for the PSBs. The next test is whether PSBs can sustain disciplined underwriting, effective governance, timely recoveries and profitable credit growth through future cycles.

Thank you for joining us in this special edition of the Financial Chronicle! We hope you're as excited about these changes as we are. Until next time, Happy investing!