Are PSU Banks making a comeback?

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In today’s edition of The Daily Brief:

• Once broken, now thriving: The PSU Bank miracle
• India’s energy future: Inside Reliance’s big oil deal

Once broken, now thriving: The PSU Bank miracle

When banks give out loans, they know not everyone will pay them back. Some loans can go bad; when that happens, they’re called Non-Performing Assets (NPAs).

Banks have been lending money long enough to understand the chances of this happening. So, they plan ahead. How? By setting aside a portion of their profits to cover these losses. It’s just a way of being financially prepared.

Even though these bad loans show up on the bank’s balance sheet, they’re ready for the worst-case scenario—when it’s clear that the borrower isn’t going to pay.

In extreme cases, banks decide to "write off" loans from their books. This means those loans no longer show up on their balance sheets. However, banks don’t give up—they still try to recover the money, and borrowers are still responsible for paying it back.

Recently, the write-off numbers for public sector banks were released. In the first half of FY25, the amount was ₹42,035 crore. It was ₹1.14 lakh crore in FY24 and ₹1.18 lakh crore in FY23. Over the three years before that, the total write-offs added up to ₹4.26 lakh crore.

If you take a closer look, there’s a clear trend here. The amount of bad loans written off by public sector banks has been steadily decreasing. On top of that, out of the ₹7 lakh crore in bad loans written off since FY20, ₹5 lakh crore has been recovered—roughly 70% of the total amount. For FY25, the recovery rate has been impressive at 95%.

This shows that public sector banks are not only writing off fewer bad loans over time, but they’re also recovering a higher percentage of them. As a result, their credit costs have been consistently coming down.

Source: Care Ratings

What does this mean? It shows that the asset quality of public sector banks is improving. But this progress comes after some very tough times almost a decade ago and all the firefighting that the RBI and the government did to fix things.

Let’s look at the history, starting with a major wake-up call called the Asset Quality Review (AQR). Back in 2015, the Reserve Bank of India (RBI), under Governor Raghuram Rajan, decided to take a hard look at the books of Indian banks.

Why? Because there were growing concerns about bad loans, especially in the wholesale lending space. This refers to loans given to large corporations, not everyday people like us. During the economic boom of 2006-08, banks had handed out loans left and right, but not all of them were good decisions.

Big corporate borrowers—like Kingfisher Airlines, Bhushan Steel, and Amtek Auto—started defaulting on their loans. These were loans that banks had claimed were fine, but they were actually in bad shape. The AQR uncovered the reality. To give you an idea, bad loans in the Indian banking system shot up by 80% in FY16, largely because of the AQR, according to RBI data.

To clean up the mess, the government launched the 4Rs strategy:

1. Recognition: Acknowledge the problem. The AQR forced banks to identify and accept their bad loans instead of hiding them.
2. Resolution: Work on resolving bad loans. Tools like the Insolvency and Bankruptcy Code (IBC) ensured time-bound solutions for stressed assets.
3. Recapitalization: Public sector banks needed funds to survive. The government injected ₹3.1 lakh crore into these banks between 2016-17 and 2020-21 to stabilize them.
4. Reform: Finally, reform the banking system to prevent such a crisis from happening again.

The government didn’t just throw money at the problem; it also pushed for meaningful reforms. Here’s a quick look at some key changes, in chronological order:

• Insolvency and Bankruptcy Code (IBC) (2016): The IBC introduced a faster way to resolve bad loans by giving creditors (banks) more control and setting strict timelines for resolving stressed assets. The average recovery rate through IBC was over 40%, compared to just 26% with older methods. It also reduced resolution time from 4.3 years to 460 days by 2021 and boosted India’s ease of doing business rankings.
• Bank Board Bureau (BBB) (2016): To improve governance in public sector banks, the BBB was set up to recommend top-level appointments, evaluate the performance of bank boards, and guide reforms in governance practices.
• Public Sector Bank (PSB) Consolidation (2017-2020): Weak banks were merged with stronger ones to create fewer but more robust institutions. For example, SBI merged with its associate banks, and Bank of Baroda absorbed Dena Bank and Vijaya Bank. These moves helped improve efficiency and scale.
• Amendments to the SARFAESI Act (2018): The government strengthened the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to simplify asset recovery. It gave more powers to Asset Reconstruction Companies (ARCs) and extended its coverage to include non-banking financial companies (NBFCs) with assets of ₹100 crore or more.
• Public Credit Registry (2021): A centralized database was launched to track borrowers’ credit histories. This made it easier to detect and prevent loan fraud and discouraged practices like evergreening loans.
• National Asset Reconstruction Company Limited (NARCL) (2021): Known as the "bad bank," NARCL was set up to focus on resolving large, high-value stressed assets. Along with the India Debt Resolution Company Limited (IDRCL), it aimed to clean up bank balance sheets and speed up recoveries.

Fast forward to today, and public sector banks have made significant progress. According to a report by Motilal Oswal, the Gross NPA ratio for PSBs dropped to 5.2% in FY23, compared to a peak of 14.6% in FY18. The reforms have clearly worked, and asset quality is now even better than it was before the AQR. Pretty impressive, right?

Source: Motilal Oswal

But here’s the thing: stability doesn’t always mean safety. Now, the focus is shifting to unsecured retail lending—like credit cards and personal loans. With demand for these loans booming, the risk of defaults is also rising. If banks aren’t cautious, this could lead to another credit crisis, but this time driven by retail loans instead of corporate lending.

India’s energy future: Inside Reliance’s big oil deal

This story is as much about economics as it is about geopolitics. Reliance Industries has signed a historic energy deal with Russia’s Rosneft—the biggest ever between India and Russia. Under the deal, Reliance will buy 500,000 barrels of crude oil every day for the next 10 years, totaling $13 billion a year.

To put that into perspective, India uses about 5 million barrels of oil daily, so this deal covers around 8–10% of the country’s daily oil needs. That’s a significant share. The crude oil will be refined at Reliance’s Jamnagar complex and turned into fuels like petrol and diesel, as well as petrochemicals used in everyday products like plastics and synthetic fibers. This isn’t just a business move—it’s a critical step for India’s energy security and economy.

But deals like this don’t happen overnight. This one is the result of a series of events that have been unfolding for years.

Let’s rewind to February 2022, when the Russia-Ukraine war broke out. Western countries hit Russia with tough sanctions, including bans on the purchase, import, and transport of Russian oil to the European Union. These sanctions cut Russia off from a major market, forcing it to find new buyers who were willing to look past the geopolitical tensions. That’s where India stepped in.

Before 2022, India barely imported any oil from Russia. But by 2024, nearly 40% of India’s crude oil comes from Russia—around 2 million barrels per day. The main reason? Cost. Russian oil is simply cheaper.

Source: Economist

When sanctions were first imposed, Russian oil was sold at a steep discount—up to $30 per barrel cheaper than oil from the Middle East. But as demand from countries like India and China increased, the discount got smaller. Today, it’s around $3–4 per barrel. Even so, it still helps India save money and lower its import bill.

Source: CREA

The U.S. tried to cut off Russian oil exports by banning imports and targeting the shipping networks that transported Russian crude. They imposed sanctions on Sovcomflot, Russia’s state-owned shipping company, and other firms involved in moving oil. To avoid any trouble, Reliance, like many others, stopped using these sanctioned ships.

In response, Russia created a "shadow fleet"—a group of older ships that were bought or leased to operate outside Western control. These ships allow Russia to keep exporting oil, even under sanctions. While this approach comes with risks, it has enabled buyers like Reliance to continue importing Russian oil without directly violating the rules.

Source: CREA

India has been determined to keep buying oil at a discount, and Reliance has taken the lead. Earlier this year, Reliance tested the waters with a smaller deal—3 million barrels a month from Rosneft.

Now, they’ve followed up with the big one: 500,000 barrels per day. The timing of this major deal with Rosneft is significant too. It came right after the BRICS summit, highlighting the strengthening ties between India and Russia.

But let’s not forget—oil isn’t just about business. It’s deeply connected to global politics. By building closer ties with Russia, India is making it clear that it will prioritize its own energy needs, even if it faces pressure from the West. Deals like this can also create political ripples that are hard to predict.

In the end, this deal reflects the complexity of global oil politics. From sanctions on Russia to India’s growing imports, every move is part of a much bigger picture. For Reliance, it’s a smart business move. For India, it’s a step toward energy security. But beyond the numbers, there are always political motivations at play—and we may never know the full story.

Tidbits

1. SEBI has proposed a new framework that will allow retail investors to take part in algorithmic trading. Under this framework, brokers will need to approve all algorithms, and algo orders will be given unique tags. The algorithms will be categorized into two types: Execution Algos (White Box) and Black Box Algos. Brokers will also need to identify algo orders and collaborate with approved providers. Public feedback on the proposal is open until January 3, 2025.
2. Reliance Retail faced a tough 2024 due to weak demand and growing competition. According to Jefferies, the company may need to focus more on quick commerce to align with its omnichannel ambitions, especially after its investment in Dunzo. Reports suggest Reliance could target a 30-minute delivery service, as quick commerce continues to expand in major cities.
3. Meanwhile, Blinkit has launched "Bistro," a 10-minute food delivery service. This puts it in direct competition with platforms like Zepto Cafe and Swiggy’s Bolt. The app offers a variety of food and drink options and is currently available in parts of Gurugram.

- This edition of the newsletter was written by Kashish

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This post was first published on Substack.