Which Are Public Sector Banks?- How Does it Work?

Public Sector Banks, also called PSBs, are banks that are owned and controlled by the government. In India, the Public Sector Banks promote financial inclusion. While their main objective is to apply government policies to various sectors, they also serve as a commercial entity. These banks are also required to meet certain social and environmental goals. Major PSBs in India include the State Bank of India (SBI), the Bank of Baroda (BoB), the Punjab National Bank (PNB), the Canara Bank, the Union Bank of India, etc. This article provides you with complete details about these banks, how they work, the history of PSBs in India, an overview of Major PSBs in India, a complete list of 12 Public Sector Banks in India, and how they differ from the Private Sector Banks. Also, we have discussed here the challenges faced by the Public Sector Banks.

What are Public Sector Banks?

The PSBs are the Public Sector Banks in which the majority (50%) of the stake is owned by the Government of India. There is a total of 12 Private Sector Banks in India. They are also called Nationalized Banks because, apart from the SBI, all other banks were nationalized in 1969 & 1980. These can be either Central Government-owned banks or State Government-owned banks. These banks are owned and operated under the regulations provided by the Government of India. They offer a range of banking and financial services to individuals, businesses, and other organisations. Their main focus and priorities are different from those of the Private Sector Banks. Their main objective is to implement government schemes and ensure economic stability and financial inclusion. They provide affordable banking services to the masses.

List of Public Sector Banks in India

The full list of 12 Public Sector Banks in India is provided in the table below along with their headquarters and year of establishment.

S. No	Bank Name	Headquarters	Founded/Merged
1	State Bank of India (SBI)	Mumbai, Maharashtra	1955
2	Punjab National Bank (PNB)	New Delhi	1894 / 2020 (merger with OBC & UBI)
3	Bank of Baroda (BoB)	Vadodara, Gujarat	1908 / 2019 (merger with Dena & Vijaya Bank)
4	Canara Bank	Bengaluru, Karnataka	1906 / 2020 (merger with Syndicate Bank)
5	Union Bank of India	Mumbai, Maharashtra	1919 / 2020 (merger with Andhra & Corporation Bank)
6	Indian Bank	Chennai, Tamil Nadu	1907 / 2020 (merger with Allahabad Bank)
7	Bank of India (BOI)	Mumbai, Maharashtra	1906
8	Central Bank of India	Mumbai, Maharashtra	1911
9	Indian Overseas Bank (IOB)	Chennai, Tamil Nadu	1937
10	UCO Bank	Kolkata, West Bengal	1943
11	Bank of Maharashtra (BoM)	Pune, Maharashtra	1935
12	Punjab & Sind Bank	New Delhi	1908

Note:

• After the major bank mergers in 2019–2020, the number of PSBs was reduced from 27 to 12.
• These banks are majority-owned by the Government of India (usually over 50% stake).

How does Public Sector Banks Work in India?

Public Sector Banks are financial institutions in which the Government of India holds more than 50% stake. They serve both commercial and social welfare functions, operating under regulations set by the Reserve Bank of India (RBI) and other governing bodies. Below, we have discussed the functions of Public Sector Banks in India.

1. Ownership & Governance

• The Government of India is the majority shareholder.
• These banks are governed by:
  • Banking Regulation Act, 1949
  • Companies Act, 2013
  • Specific Acts (like SBI Act, Nationalization Acts)
• Managed by a Board of Directors, including:
  • Government nominees
  • RBI representatives
  • Independent directors

2. Sources of Funds

PSBs collect funds through:

• Public deposits (Savings, Current, Fixed)
• Borrowings (from RBI, other banks)
• Government capital infusion
• Market instruments (e.g., bonds)

3. Lending & Investment Functions

They use collected funds for:

• Retail loans (home, auto, personal loans)
• Corporate loans (infrastructure, industry)
• Agriculture and priority sector lending
• MSME support
• Investments (government securities, bonds)

4. Regulation and Supervision

• Regulated by the Reserve Bank of India (RBI).
• Subject to guidelines on:
  • CRR, SLR, Basel norms
  • Priority sector lending
  • NPA classification and provisioning

5. Customer Services & Financial Inclusion

• Offer full banking services including:
  • Internet & mobile banking
  • UPI, NEFT, RTGS, IMPS
  • Insurance, mutual funds, pensions
• Promote financial inclusion through:
  • PM Jan Dhan Yojana
  • Direct Benefit Transfers (DBT)
  • Rural banking and no-frills accounts

6. Social Responsibility

PSBs play a key role in:

• Economic development of under-served regions
• Implementation of government schemes:
  • MUDRA loans
  • PMAY (Housing)
  • Stand-Up India
  • Kisan Credit Cards

7. Internal Operations

• Branch network managed through Core Banking System (CBS).
• Departments for risk management, HR, audit, treasury, credit, compliance, etc.
• Operate ATMs, business correspondents, and mobile units.

History of Public Sector Banks in India

The History of Public Sector Banks is divided into 5 Phases:

1. Pre-Independence Phase (before 1947)
2. Post-Independence Phase (1947-1968)
3. Nationalisation Phase (1969-1980)
4. Reform Era (1991 onwards)
5. Consolidation Phase (2017-2020)
6. Current Phase (As of 2025)

1. Pre-Independence Era (Before 1947)

• Banking in India was primarily dominated by private and foreign banks.
• Most banks were founded by private individuals or companies.
• Several banks failed due to mismanagement and lack of regulation.

2. Post-Independence Phase (1947–1968)

• After independence, the Government of India realized the importance of a regulated and inclusive banking system to serve economic development.
• In 1955, the Imperial Bank of India was nationalized and renamed as the State Bank of India (SBI). This was the first Public Sector Bank in India.
• SBI was tasked with expanding banking facilities in rural areas.

3. Nationalization Phase

The Nationalisation Phase is further divided into two phases: First Phase, which is 1969, when 14 major Private Banks were nationalized. And the Second Phase is 1980, when 6 more Private Banks were nationalized.

a. First Phase – 1969

1. On 19 July 1969, the Indira Gandhi-led government nationalized 14 major private banks (each having deposits of over Rs. 50 crore).
2. Objective: Ensure credit availability to agriculture, small industries, and priority sectors.
3. This marked the real birth of PSBs as a dominant force in Indian banking.

b. Second Phase – 1980

1. In April 1980, 6 more private banks were nationalized.
2. Total nationalized banks increased to 20.
3. These banks came under public ownership, further expanding government influence in the economy.

4. Reform Era – 1991 Onwards

1. The Narasimham Committee (1991) recommended reforms to make PSBs more efficient and competitive. These reforms were called Liberalization, Privatisation, and Globalisation. In short, it is called LPG Reforms.
2. Liberalization allowed private and foreign banks to re-enter the market.
3. Government introduced measures like:
   • Capital adequacy norms
   • NPA management
   • Autonomy for PSBs

5. Consolidation Phase (2017–2020)

To create stronger and more efficient banks, the government started merging PSBs. In this Phase, 10 PSBs merged into 4 large ones. It reduced the number of PSBs from 27 to 12.

1. 2017: SBI merged with its 5 associate banks + Bharatiya Mahila Bank.
2. 2019–2020: 10 PSBs merged into 4 large ones.
   • Example: Punjab National Bank + Oriental Bank of Commerce + United Bank of India
3. After consolidation, the number of PSBs reduced from 27 (in 2017) to 12 (as of 2020).

6. Current Phase (as of 2025)

1. Currently, India has 12 Public Sector Banks.
2. PSBs still play a crucial role in implementing government schemes, financial inclusion, and agricultural financing.
3. Challenges: High NPAs, technological competition from private & digital banks.

Major Public Sector Banks in India – Overview

We have discussed here an overview of the major Public Sector Banks in India. It includes the State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India, and Indian Bank.

1. State Bank of India (SBI)

• Headquarters: Mumbai, Maharashtra
• Founded: 1955 (as SBI, predecessor: Imperial Bank of India)
• Significance: Largest bank in India in terms of assets, branches, and employees.
• Merger History: Merged with its 5 associate banks and Bharatiya Mahila Bank in 2017.
• Key Roles:
  • Implements major government schemes like PM Jan Dhan Yojana, Mudra loans.
  • Dominant in rural, agricultural, and digital banking.

2. Punjab National Bank (PNB)

• Headquarters: New Delhi
• Founded: 1894
• Merger: United Bank of India and Oriental Bank of Commerce merged with PNB in April 2020.
• Significance: Second largest PSB after SBI.
• Key Areas: MSME lending, retail banking, rural finance.

3. Bank of Baroda (BoB)

• Headquarters: Vadodara, Gujarat
• Founded: 1908
• Merger: Dena Bank and Vijaya Bank merged with BoB in April 2019.
• Highlights:
  • Strong global presence (branches in 20+ countries).
  • Known for its tech adoption and overseas banking.

4. Canara Bank

• Headquarters: Bengaluru, Karnataka
• Founded: 1906
• Merger: Syndicate Bank merged with Canara Bank in April 2020.
• Strengths:
  • Emphasis on priority sector lending and financial inclusion.
  • Strong South India network.

5. Union Bank of India

• Headquarters: Mumbai, Maharashtra
• Founded: 1919
• Merger: Andhra Bank and Corporation Bank merged with Union Bank in 2020.
• Features:
  • Active in MSME sector, digital transformation.
  • Widely present in both metro and semi-urban areas.

6. Indian Bank

• Headquarters: Chennai, Tamil Nadu
• Founded: 1907
• Merger: Allahabad Bank merged with Indian Bank in 2020.
• Specialization:
  • Known for robust rural banking and customer-centric services.

How Major PSBs Contribute to Economy

• They carry out Government financial inclusion schemes like PMJDY, PMAY, etc.
• Offer agriculture, MSME, and priority sector loans.
• Help stabilize the economy through public trust and wide reach.
• Key players in DBT (Direct Benefit Transfer) and subsidy delivery.

Are Nationalized Banks and Public Sector Banks the Same?

No, the Nationalized Banks and the Public Sector Banks are not the same. The nationalized banks are banks that were originally private banks taken over (nationalized) by the Government. They were originally private sector banks before nationalization. Specifically refers to those nationalized in 1969 & 1980. SBI is not included among nationalized banks. Examples include PNB, BoB, Canara Bank, Indian Bank, etc. They are often called Public Sector Banks because after nationalization majority of the stake (more than 50%) is owned by the government. It can be said that all nationalized banks are Public Sector Banks, but not all PSBs are nationalized banks. Out of 12 PSBs, 11 are nationalized banks.

Difference Between Public Sector and Private Sector Banks

The Public and Private sector banks differ in many aspects. They differ in terms of ownership, management control, establishment, Loan Processing, Technology adoption, Profitability, Job Security, and Focus Area. Public Sector Banks focus on nation-building, rural banking, and government initiatives. Private Sector Banks focus on profitability, customer service, and efficiency. The basic difference between Public Sector Banks and Private Sector Banks is provided in the table below.

Basis of Difference	Public Sector Banks (PSBs)	Private Sector Banks
Ownership	Majority stake (more than 50%) held by the Government of India	Majority stake held by private individuals or corporations
Examples	SBI, PNB, Bank of Baroda, Canara Bank, Union Bank, etc.	HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, etc.
Management Control	Controlled and managed by the Government	Managed by private promoters or corporate boards
Establishment	Many were nationalized or established by the government	Established by private entities with RBI license
Customer Base	Larger base in rural and semi-urban areas	More active in urban and metropolitan areas
Loan Processing	Usually slower, with more formalities	Generally faster, more tech-driven and customer-oriented
Technology Adoption	Improving gradually; some lag behind private banks	Early adopters of digital and innovative banking solutions
Profitability	Moderate profitability due to social obligations	Higher profitability, more market-driven
Job Security	Higher job security and fixed benefits	Comparatively lower job security but performance-based incentives
Focus Area	Financial inclusion, priority sector lending, government schemes	Retail banking, wealth management, corporate loans

Both types of Banks are important for the stable economy of a nation. The Purpose of Public Sector and Private Sector banks differs in such a way that:

• For financial inclusion and stability: Public Sector Banks.
• For innovation, speed, and convenience: Private Sector Banks.

Challenges Faced By Public Sector Banks in India

There are many challenges faced by the Public Sector Banks, which have a significant impact on their efficiency and Profitability. These challenges include High non-performing assets, Poor credit appraisal and Risk management, Lack of technological advancement, Human resource challenges, Over-dependence on government, Inefficient corporate governance, Customer service issues, Low Capital adequacy, and Stiff competition from Private and Foreign Banks. Later we have discussed the impact of these challenges and what is done to overcome it.

1. High Non-Performing Assets (NPAs)

• A significant portion of loans, especially to corporates and priority sectors, turn into bad loans.
• Recovery of loans is often delayed or stuck in legal procedures.

2. Poor Credit Appraisal and Risk Management

• Weak assessment of borrower credibility.
• Lending decisions sometimes influenced by political or external pressures.

3. Lack of Technological Advancement

• Slower adoption of digital banking, AI, and data analytics compared to private banks.
• Legacy systems often cause operational inefficiencies.

4. Human Resource Challenges

• Shortage of skilled professionals in areas like risk management, cybersecurity, analytics.
• Rigid promotion system, lack of performance-based rewards.

5. Over-dependence on Government

• Too much reliance on government funding (recapitalization) to cover losses.
• Limited autonomy in decision-making.

6. Inefficient Corporate Governance

• Lack of accountability and transparency in top-level decision-making.
• Sometimes affected by bureaucratic delays and interference.

7. Customer Service Issues

• Long queues, outdated processes, and poor grievance redressal in some branches.
• Lower customer satisfaction compared to private banks.

8. Low Capital Adequacy

• Public Sector Banks often face capital shortages to meet regulatory requirements (like Basel III norms).
• Affects lending capacity and expansion.

9. Stiff Competition from Private & Foreign Banks

• PSBs struggle to retain high-value customers and younger demographics.
• Competitors offer faster, more personalized services.

10. Impact of These Challenges

• Reduced profitability.
• Shrinking market share.
• Erosion of public confidence in some cases.

What is Done to Overcome Challenges Faced by PSBs?

• Bank mergers are to improving efficiency.
• Mission Indradhanush and PSB Reforms Agenda for governance overhaul.
• Creation of NARCL (bad bank) – National Asset Reconstruction Company Limited to deal with NPAs.
• Increased focus on digital transformation.

Summary

The PSBs are the Public Sector Banks in which the majority (50% or more) of the stake is owned by the Government of India. They are also called Nationalized Banks because, apart from the SBI, all other banks were nationalized in 1969 & 1980. Major PSBs in India include the State Bank of India (SBI), the Bank of Baroda (BoB), the Punjab National Bank (PNB), the Canara Bank, the Union Bank of India, etc. The History of Public Sector Banks is divided into 5 Phases: Pre-Independence Phase (before 1947), Post-Independence Phase (1947-1968), Nationalisation Phase (1969-1980), Reform Era (1991 onwards), Consolidation Phase (2017-2020), and Current Phase (As of 2025).

The Public Sector banks are mainly used for Financial Inclusion and stability, whereas Private Sector Banks are used for innovation, speed, and convenience. There are many challenges faced by the Public Sector Banks, like High NPAs, a Lack of technological advancement, and customer service issues. Mission Indradhanush is launched for PSB reforms. Also, an organisation named National Asset Reconstruction Company Limited (NARCL) is established to deal with the Non-Performing Assets in Public Sector Banks.

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