PSU Banks Sink Amid Regulatory Shock

Indian public sector banks (PSBs) have faced quite a reversal of fortunes in 2025. After a tremendous run in 2024, where the Nifty PSU Bank Index zoomed upwards by more than 24%, in recent months, a sudden decline has taken over, with some PSB counters falling up to 40% from their respective peaks. The larger catalyst behind the fall has been the RBI's announcement that it would impose greater restrictions regarding infrastructure project finance, therefore puzzling investors speculating on profitability.

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Regulatory Overhaul Sparks Market Turmoil

In 2024, the RBI passed a draft circular proposing tighter norms on project finance. The new norms required lenders to make a provision of up to 5% for loans during construction, a higher requirement than the previous 0.4%. This requirement is intended to mitigate the risk of project delays and cost overruns.

The first reaction to these new norms came swiftly and dramatically. The shares of major PSBs, including Punjab National Bank, Canara Bank, and Bank of Baroda, went down by as much as 6%, whereas the Nifty PSU Bank Index was down over 4%. Analysts estimate that the increased provisioning could weigh on the CET1 ratios of these banks by 7 to 30 basis points, thereby affecting their lending capability.

SBI's Leadership Amidst the Storm

As the largest public sector bank, SBI is pivotal in the broader PSB ecosystem. The bank has remained resilient and adaptive under the chairmanship of Dinesh Khara. In brief, for the H1 period of 2024-25, PSBs have witnessed a 25% increase in net profit to the level of ₹85,520 crore, with a sizeable portion contributed by SBI.

SBI has taken several initiatives, such as requesting tax relief on interest income, to enhance deposit mobilization by its member banks. In essence, strengthening its liability franchise and maintaining good asset quality will enable SBI to cushion the effect of the new provisioning norms and keep the growth path intact.

Policy Tailwinds and the Road Ahead

Several policy-driven factors can support a revival of PSB performance despite the current adverse conditions. Also, with the Indian government's focus on infrastructure development and capital expenditure, PSBs, in turn, get opportunities to further enlarge their lending portfolios. Further, enhanced asset quality across PSBs, with gross NPAs coming down to 3.12% in September 2024 from a peak of 14.58% in March 2018, marks the sector's strength.

Besides, another factor that has improved to 15.43% as of September 2024 is the CRAR for PSBs, which is far above the RBI's minimum prescription of 11.5%, confirming a strengthened capital base to absorb potential shocks.

Investor Sentiment and Market Dynamics

PSB valuation has been under scrutiny due to the recent downturn. While these stress provisioning requirements are short-term impediments, the PSEs will grow amid policy support and improving financial parameters in the long run. Analysts feel such a correction would provide an attractive entry opportunity for long-term investors.

In contrast, the recovery road depends on the proper enforcement of these new regulations and the capacity of the PSBs to realign their business models accordingly. The leadership within SBI and its strategic initiatives will be paramount in setting the tone for the sector's reaction to these changes.

Conclusion

The significant drop in PSB stocks in 2025 underscores how the sector gives in to regulatory changes. However, with a solid leader at the helm in SBI, government policy backing, and improved financial health, the industry now stands to face its present challenges and hopefully come out stronger. Willing eyes will watch how these banks mold themselves in the changing scenario to maximise the opportunities.