Asset Quality of Public Sector Banks – Q4FY25

There was a time when Public Sector Bank (PSB) stocks were widely viewed as underperformers, burdened by a mountain of bad loans, and seen as dependent on government backing to survive. This article examines the asset quality of public sector banks in Q4FY25.

Their sheer volume of non-performing assets (NPAs) had investors worried about their sustainability. Without government guarantees, these banks seemed at constant risk of collapse. Fast forward to FY24-25, and the story has dramatically changed. Public Sector Banks have made significant progress in reducing their NPAs, leading to a sharp improvement in their asset quality.

What Went Wrong?

The decline in asset quality of public sector banks can be traced back to the period following the 2008 Global Financial Crisis. To boost credit growth and support the economy, PSBs began aggressively disbursing loans, often without adequate due diligence. Many borrowers lacked the financial strength, viable business models, or sufficient collateral to justify the lending. The absence of risk assessment led to a wave of defaults, especially in the infrastructure and industrial sectors.

Some of the top defaulters included:

• Jaiprakash Associates – ₹61,000+ crore (Mar 2014)
• Bhushan Steel – ₹46,000+ crore (Mar 2017)
• Videocon Industries – ₹40,000+ crore (Mar 2015)
• GMR Airports – ₹43,000+ crore (Mar 2015)
• Suzlon Energy – ₹9,000+ crore (Mar 2015)
• Kingfisher Airlines – ₹8,000+ crore (Mar 2013)

Several infrastructure firms also contributed to the NPA crisis:

• Lanco Infra – ₹43,000 crore (Mar 2017)
• Gammon India – ₹10,000 crore (Sep 2014)
• Gayatri Projects – ₹6,500 crore (Mar 2014)
• GVK Power & Infra – ₹22,000 crore (Mar 2015)
• IVRCL – ₹8,500 crore (Mar 2014)

Government Intervention and the Road to Recovery

Recognizing the systemic risk, the government initiated several reforms to clean up PSBs’ balance sheets. A key milestone was the establishment of the National Company Law Tribunal (NCLT) in 2016, which facilitated the resolution and sale of distressed assets.

Recovery strategies included:

• Resolution through NCLT and Asset Reconstruction Companies (ARCs), often involving significant haircuts
• Loan restructuring to make repayment more feasible
• Bank mergers to consolidate operations and improve financial strength
• Bailouts, such as:
  • YES Bank, which was rescued by a consortium of public and private sector banks through equity infusion and a lock-in period to stabilize investor confidence
  • IDBI Bank, which the Government of India supported through LIC

As of December 2019, the asset quality of PSBs was still poor. Key examples:

• SBI – Gross NPA: ₹159,661 crore (6.94%), Net NPA: ₹58,249 crore (2.65%)
• Union Bank of India – Gross NPA: ₹100,431 crore (15.51%), Net NPA: ₹37,912 crore (6.48%)
• IDBI Bank – Gross NPA: 28.72%, Net NPA: 5.25%

Asset Quality of Public Sector Banks – Q4FY25

PSBs have made major strides in the last fiscal year (FY24-25), outperforming expectations and even surpassing some private sector banks in terms of asset quality. Key highlights include:

• Punjab National Bank (PNB) recorded the highest reduction in NPAs, cutting Gross NPA by ₹12,261 crore and Net NPA by ₹2,508 crore. The bank provisioned ₹1,675 crore during the year.
• Canara Bank reduced its Gross NPA by ₹9,075 crore and Net NPA by ₹4,470 crore, with Gross NPA declining by 129 basis points. This marks a significant turnaround from a GNPA of ₹61,975 crore in December 2019.
• SBI and Union Bank of India also reduced their Gross NPAs by over ₹7,000 crore each.
• SBI now boasts a Gross NPA ratio of 1.82%, while Bank of Maharashtra leads with 1.74%.
• IDBI Bank has brought down its Net NPA to an impressive 0.15%.
• UCO Bank has seen a dramatic improvement, reducing its GNPA from 19.45% (Dec 2019) to 2.64% (Q4FY25).

Most PSBs are now well-provisioned against their stressed assets. The Provision Coverage Ratio (PCR) for most stands at around 75% or higher. Notably:

• Punjab National Bank – PCR: 90.27%
• Bank of Maharashtra – PCR: 90.18%

Conclusion

The transformation in asset quality of Public Sector Banks has been remarkable. From being shunned by investors to becoming credible contenders in the financial sector, PSBs have turned a corner. Supported by policy reforms, internal restructuring, and improved credit discipline, many PSBs now boast stronger asset books than their private counterparts. With Net NPAs falling below 1% in several cases, investor sentiment is shifting, signaling a new era for public sector banking in India.

Also Read: Performance of Banks in Q4FY25: Moving into a Challenging Territory

Also Read: Performance of IT Companies in Q4FY25 – Navigating an Uncertain Path

Also Read: Mahindra & Mahindra Q4FY25 Financial Results – Strong Growth with Margin Pressures

References

• Investor presentation of State Bank of India
• Investor presentation of Bank of Baroda
• Investor presentation of Punjab National Bank
• Investor presentation of Bank of Maharashtra
• Quarterly Results for Q4FY24 of Bank of Maharashtra
• Media Release of IDBI Bank
• Investor presentation of Central Bank of India
• Investor presentation of UCO Bank
• Investor presentation of Union Bank of India
• Investor presentation of Indian Overseas Bank
• Investor presentation of Canara Bank
• Investor presentation of Punjab & Sind Bank
• Investor presentation of Indian Bank
• Investor presentation of Bank of India