PSU banks lead Q3 BFSI performance; HDFC Bank sees system-level growth in FY26: Kaitav Shah

The recent outperformance of Public Sector Undertaking (PSU) banks in Q3 against the broader Banking, Financial Services, and Insurance (BFSI) sector marks a significant turning point in India's financial landscape. This robust performance, primarily fueled by stronger year-on-year credit growth, suggests a period of recovery and renewed strength for institutions that were once burdened by Non-Performing Assets (NPAs).

To truly appreciate this development, we must delve into its background context. For much of the last decade, particularly post-2010, Indian banks, especially PSUs, grappled with a severe NPA crisis. This was often termed the 'twin balance sheet problem,' where stressed corporate balance sheets led to stressed bank balance sheets. Years of aggressive lending, particularly to infrastructure and industrial projects, coupled with economic slowdowns and policy paralysis, resulted in a massive build-up of bad loans. This crisis significantly hampered banks' ability to lend, thereby throttling credit flow to the economy and impacting investment and growth. The government and the Reserve Bank of India (RBI) initiated several measures to tackle this, including the Asset Quality Review (AQR) in 2015, the Prompt Corrective Action (PCA) framework for weak banks, and massive recapitalization efforts (like the Indradhanush scheme launched in 2015). A landmark step was the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, which provided a time-bound mechanism for resolving corporate insolvencies and recovering bad debts, a significant departure from earlier, less effective laws like SARFAESI Act, 2002.

The current Q3 performance indicates that these sustained efforts are finally yielding results. PSU banks have demonstrated improved asset quality, leading to lower credit costs and higher profitability. Their credit growth is driven by both retail and corporate segments, including government-led infrastructure projects. In contrast, smaller private banks and Non-Banking Financial Companies (NBFCs) faced 'transitional pressures.' This could be due to increased competition, higher funding costs, or tighter regulatory scrutiny, especially for NBFCs post the IL&FS crisis of 2018, which highlighted systemic risks in the shadow banking sector. HDFC Bank's expectation of system-level growth in FY26, as noted by analyst Kaitav Shah, further underscores the belief in a broader sector stabilization and a more balanced growth trajectory across the financial ecosystem.

Several key stakeholders are involved here. The **Public Sector Banks (PSBs)** are central, given their dominant market share and critical role in implementing government policies like financial inclusion (e.g., Pradhan Mantri Jan Dhan Yojana). Their health is paramount for the economy. **Private Sector Banks** bring efficiency, technology, and competition. **NBFCs** play a crucial role in extending credit to underserved segments but require careful regulation. The **Reserve Bank of India (RBI)**, as the central bank and primary regulator (under the Reserve Bank of India Act, 1934, and Banking Regulation Act, 1949), ensures financial stability, sets monetary policy, and supervises banks. The **Government of India** is a key stakeholder as the owner of PSBs and the architect of economic policies that impact the financial sector. Finally, **customers and investors** are directly affected by the availability of credit, interest rates, and the overall stability of the financial system.

The significance of this trend for India is profound. A healthy banking sector is the backbone of any growing economy. Robust credit growth from PSBs means increased funding for businesses, infrastructure, and individuals, directly contributing to investment, consumption, and GDP growth. It signals a stronger financial system less prone to crises, which boosts investor confidence, both domestic and foreign. From a broader governance perspective, the recovery of PSBs indicates the success of the government's reforms in addressing historical systemic issues. While not directly linked to specific constitutional articles, the government's role in ensuring economic stability and promoting welfare through institutions like PSBs aligns with the spirit of Directive Principles of State Policy (DPSP), particularly Article 39(b) and (c) which advocate for equitable distribution of material resources and prevention of concentration of wealth. Article 282, which provides for grants by the Union and States, has been instrumental in the recapitalization of PSBs.

Looking ahead, the future implications are promising. Sustained credit growth is vital for India's ambition of becoming a $5 trillion economy. The improved health of PSBs will foster greater competition, potentially leading to better services and more innovative financial products. However, continued vigilance on asset quality, especially in a dynamic economic environment, will be crucial. The ongoing digital transformation in banking, driven by initiatives like UPI and ONDC, will further reshape the sector, pushing all players towards greater efficiency and customer-centricity. The RBI will likely maintain its focus on regulatory oversight to prevent future build-ups of stress, ensuring the stability and resilience of India's financial system.