PSU Banks Turnaround: NPAs Fall from 9.11% to 1.93%, Net Profit Hits All-Time High ₹1.98 Lakh Cr in FY26

A few years ago, if you told someone to put money in PSU banks, they would have looked at you like you had lost the plot. These were the banks carrying mountains of bad loans, going back to the government every other year with a begging bowl for fresh capital, and watching their stock prices drift lower with every passing quarter. Investors had largely written them off, not as businesses that could fail overnight, but as the kind of stocks you park your money in and forget, hoping something changes eventually.

Something did change. And quite dramatically at that.

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Gross NPA of PSU Bank

By 2026, the gross NPA ratio, which once sat at 9.11% in FY21, has fallen all the way to 1.93% in FY26. Net NPAs are down to just 0.39%. These are not small improvements, they represent a fundamental shift in how these banks are being run and how their loan books are being managed.

PSU Bank Net Profits Hits All-Time High in FY26

The profit numbers tell an equally striking story. Combined net profits of PSU banks have climbed to nearly ₹1.98 lakh crore in FY26, compared to just ₹31,820 crore in FY21. That is not a gradual improvement, that is a complete reset of what these banks are capable of earning. State Bank of India alone posted a net profit of ₹80,032 crore in FY26, with Bank of Baroda, Canara Bank, Punjab National Bank, and Union Bank of India all reporting strong numbers of their own. Loan growth hit 15.7% YoY, deposit growth came in at 10.6%, and total business reached ₹283.3 lakh crore; a 12.8% jump over the previous year.

Return on assets has crossed the 1% mark, a threshold that was considered aspirational for most PSU banks not too long ago. Return on equity has settled in the 18–19% range. These are numbers that would have seemed almost fictional five years back.

Nifty PSU Bank Performance: SBI, Bank of Baroda and Others

Markets have a habit of identifying the change before the rest of us catch on, and PSU banks were no different. While the broader conversation about these banks was still dominated by doubt and concern, stock prices had already started moving. The Nifty PSU Bank Index delivered a CAGR of close to 33% over the last five years, comfortably outpacing the Nifty 50's roughly 10% CAGR over the same period.

The index itself At the individual stock level, the returns are even more eye-catching. State Bank of India delivered a five-year return of 168.55%. Bank of Baroda returned 260.81%. Canara Bank gained 340.16%, Union Bank of India was up 334.71%, and Punjab National Bank returned 181.79%. Across these five major names, the average five-year return works out to somewhere in the 250–260% range.

The important thing to understand is that this was not a purely sentiment-driven rally. Yes, the sector was starting from a very low valuation base, and some of the early gains showed a repricing of excessive pessimism. But as the quarters rolled by, the earnings kept coming in, the bad loan numbers kept improving, and investors began realising this was not just a short-lived bounce. It was something more durable.

Domestic institutional investors gradually increased their allocations as earnings visibility improved. Retail investors followed as stock performance attracted attention. Dividend payouts, which had been patchy during the lean years, started becoming more consistent and meaningful as internal capital generation strengthened.

What Actually Changed for PSU Banks

The turnaround did not happen by accident. A few things came together at roughly the same time. 

Years of aggressive provisioning, combined with recoveries through the Insolvency and Bankruptcy Code, helped clear a significant chunk of the old stressed assets that had been dragging down profitability. As slippages came down and recoveries picked up, credit costs fell sharply and lower credit costs flowed almost directly to the bottom line.

Credit demand also came back in a meaningful way. Loan growth hit 15.7% in FY26, driven by retail lending, MSME financing, infrastructure-linked credit, and a gradual revival in corporate capital expenditure. The growth was not concentrated in one pocket, it spread across retail, agriculture, MSME, and infrastructure segments, which generally makes for a healthier and more resilient loan portfolio.

Governance and underwriting standards also tightened considerably. Provisioning coverage ratios have been maintained well above 90%, meaning banks are not leaving themselves exposed if a loan does turn bad. The days of large, poorly monitored corporate loans quietly going sour are not entirely behind us, but the guardrails today are clearly far stronger than they were during the stress years.

Conclusion

PSU banks have come a long way from the days when they were seen as little more than a problem waiting to get worse. Cleaner books, record profits, stronger governance, and genuine investor interest; these are not things that happen overnight, and they do not reverse overnight either. The foundations being built today look considerably more solid than anything this sector had to offer five years ago. PSU banks are no longer a story you can afford to ignore. The turnaround has happened.