PSU Bank Stocks Rally as Centre Considers Fresh Reforms, Consolidation Plans

Public sector bank stocks witnessed a strong rally on July 16, even as broader markets remained subdued. The Nifty PSU Bank index surged over 1.5%, led by gains in Punjab & Sind Bank, State Bank of India, and Punjab National Bank, following reports that the Centre is evaluating a new round of financial sector reforms.

Market buzz suggests the government is considering further consolidation of PSU banks, along with steps to attract long-term investors and strengthen the capital base.

This news has sparked fresh interest in PSU banking stocks, which have already been gaining investor attention in 2025.

Bigger Banks for a Growing Economy?

According to sources cited by CNBC-TV18, the Centre may explore another round of consolidation, similar to the large-scale mergers carried out in 2019. The aim is to create larger, more robust public sector banks that can support the credit needs of India’s fast-growing economy.

“The government is looking at forming stronger banking institutions capable of meeting higher credit demand,” said sources familiar with the matter.

At 12:50 PM on July 16, the Nifty PSU Bank index was up 1.5%, with no losses reported across its 12 constituents. Notably, Punjab & Sind Bank gained up to 2.6%, with SBI and PNB not far behind.

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Foreign Investment and Corporate Entry on the Table

Another key reform under discussion is raising the current 20% cap on foreign ownership in PSU banks. If approved, this move could attract more long-term institutional investors and help expand the capital pool for public sector lenders.

Additionally, sources revealed that the government may consider allowing large corporations to enter the banking space, but with strict guardrails and RBI oversight. Safeguards being considered include:

• A cap on corporate shareholding in banks

• Restrictions to prevent self-funding through bank capital

• Permitting large NBFCs to upgrade to full-fledged commercial banks

These changes, if implemented, could reshape the Indian banking landscape, promoting both stability and growth.

High Government Holding in PSU Banks

As of the June quarter, four PSU banks – UCO Bank, Indian Overseas Bank, Punjab & Sind Bank, and Central Bank of India – had government shareholding above 90%. Expanding foreign investment and broader participation could help reduce this concentration while boosting market liquidity.

A Look Back at 2019 Consolidation

In 2019, the government merged 10 public sector banks into 4 larger entities, streamlining operations and improving scale. The current discussions signal that a similar structural overhaul may be on the cards again, with the intent to modernize and strengthen the sector further.

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