Public sector banks’ improvement over the past two years reflects a structural shift rather than a temporary recovery driven by clean-up measures, former Reserve Bank of India (RBI) Deputy Governor SS Mundra said.While acknowledging that some areas still require attention, Mundra said the sustained improvement across key financial metrics suggests public sector undertaking (PSU) banks have entered a new phase after years of balance sheet repair, recapitalisation and consolidation.He noted that PSU banks have outpaced private lenders in loan growth over the past two years, while the market share gains of Punjab National Bank have slowed. However, he pointed out that private banks continue to lead in deposit growth, current account/saving account (CASA) mobilisation and fee income, areas where PSU banks still need to improve to sustain the momentum.
Mundra said the transformation should also be viewed in the context of the sector’s clean-up cycle. Public sector banks spent several years resolving stressed assets, raising capital and integrating banks following the government’s consolidation exercise. Those measures, he said, temporarily weighed on growth but have now started producing results.He also argued that concerns over recruitment flexibility and lateral hiring should not overshadow the progress made by PSU banks in digitalisation and organisational change, adding that these institutions have adapted significantly over the past few years.Sunil Mehta, Chief Executive of the Indian Banks’ Association (IBA) and former Managing Director of Karur Vysya Bank (PNB), agreed that the improvement is rooted in structural reforms. He credited initiatives such as the government’s EASE reform agenda, the Insolvency and Bankruptcy Code (IBC), higher provisioning, better governance and digitalisation for strengthening the banking system.According to Mehta, the clean-up process that began after the RBI’s Asset Quality Review in 2015-16 enabled banks to rebuild their balance sheets, with provisioning coverage in many cases rising to as high as 90%.Mehta also argued that PSU bank valuations still leave room for improvement. While private banks continue to command significantly higher valuation multiples, he said public sector lenders have delivered stronger financial performance in recent years and could continue to benefit as reforms take hold.Offering a more cautious assessment, Harsh Vardhan, former Partner at Bain & Company and an independent director at Karur Vysya Bank, said investors should avoid assuming that the recent performance will automatically continue. He argued that two important drivers of earnings—historically low credit costs and recoveries from written-off loans—may not be sustainable over the long term.Harsh Vardhan also noted that pre-provision operating profit has remained broadly stable, suggesting there has been limited improvement in operating margins or productivity. He added that part of the recent outperformance appears to have been supported by one-off factors.For the full interview, watch the accompanying videoCatch all the latest updates from the stock market here
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