Public sector banks achieved a historic milestone in fiscal year 2025-26, with net profit reaching a record high of ₹1.98 lakh crore, marking the fourth consecutive year of aggregate profitability for state-owned banks. According to the Ministry of Finance, aggregate operating profit reached ₹3.21 lakh crore, demonstrating the sustained improvement in financial performance across the sector. The aggregate business of PSBs increased to ₹283.3 lakh crore as of March 31, 2026, registering growth of 12.8% compared to the previous year. This record performance was driven by improved asset quality, healthy credit expansion, and higher income generation, with banks focusing on resolution-led asset quality management over balance sheet clean-up through write-offs.
Public sector banks are experiencing significant liquidity challenges as their liquidity coverage ratios (LCR) declined by 10-12 percentage points in Q4FY26, falling to 114-118% levels and approaching the regulatory threshold of 100%. As per The Economic Times, this decline is primarily driven by strong loan demand outpacing retail deposit growth, forcing banks to deploy excess liquidity to fund credit expansion. Union Bank of India reported an LCR of 114% in Q4FY26, down from 124% a year earlier, while Canara Bank saw its LCR fall to 118% from 125% despite maintaining loan growth of 12% and deposit growth of 10%. SBI experienced a similar trend with its LCR declining to 124% from 133% as loans grew 17% compared to deposit growth of 11%.
Public sector banks achieved significant improvements in asset quality during fiscal year 2025-26, with loan write-offs declining to multi-year lows across major institutions. According to PTI analysis of bank earnings, most major banks including Bank of Baroda, Union Bank of India, Punjab National Bank, Central Bank of India, Indian Overseas Bank, and Indian Bank reported write-offs that were the lowest in up to eight years. This positive trend reflects improved recovery mechanisms and better credit discipline across public sector banks, with banks typically writing off loans when there is little chance of recovery through usual channels and needing to make 100 per cent provisions on such debt. As per Rediff Money Desk, the decline in write-offs was primarily attributed to lower slippages and better recoveries, with banks focusing on resolution-led asset quality management over balance sheet clean-up through write-offs.
The asset quality of public sector banks improved significantly during FY2025-26, with gross NPA ratio declining to 1.93% and net NPA ratio to 0.39% as of March 31, 2026, according to the Ministry of Finance release. Each state-owned lender maintained provisioning coverage ratio of above 90%, indicating prudent provisioning practices, improved underwriting standards, effective risk management mechanisms and strengthened balance sheet resilience. Fresh slippages continued to decline with the slippage ratio reducing to 0.7%, while total recoveries including recoveries from written-off accounts stood at ₹86,971 crore, reflecting improved recovery mechanisms and better credit discipline across PSBs. As per ICRA's Sachin Sachdeva, write-offs in PSBs have been declining over the past few years due to lower incremental slippages and healthy recoveries, with fresh non-performing advances formation declining steadily and the existing pool of legacy stressed assets continuing to shrink.
While PSU banks celebrate record profits and improved asset quality, they face an 18-year legal battle over pension updation that continues to pose significant financial risks. The M.C. Singla case, pending before the Supreme Court since 2016 after originating in the high court in 2008, seeks retrospective pension parity for retired public sector bank employees. According to pensioner bodies, nearly 2.31 lakh bank pensioners and family pensioners died between 2008 and 2025, with around 56 retirees dying every day due to the prolonged litigation. The Union government and Indian Banks' Association have opposed blanket pension parity demands, flagging the potentially large financial impact of retrospective pension revisions across the PSU banking system. While no official liability estimate has been finalised, the case is seen as having material implications for PSU bank balance sheets depending on the eventual scope of relief, adding another layer of uncertainty to the sector's financial outlook.
