EAC-PM Working Paper Highlights Efficiency Gains in Public Sector Banks

A working paper released by the Economic Advisory Council to the Prime Minister (EAC-PM) has reported that the efficiency of public sector banks (PSBs) has surpassed that of private and foreign banks over the evaluated period. The study, which covers fiscal years 2015 to 2026, analyzed 47 banks representing over 95 percent of the assets in the Indian banking system.

Authored by Soumya Kanti Ghosh, part-time member of the EAC-PM and group chief economic advisor at State Bank of India, alongside Tapas Kumar Parida, economist at State Bank of India, the research employed Data Envelopment Analysis (DEA) to measure banking efficiency and productivity on a scale of 0 to 1, expressed as a percentage.

According to the findings, the efficiency of public sector banks improved to 93.12 percent in fiscal year 2026, up from 72.46 percent in fiscal year 2020. The paper cited subsequent capital infusions and technological upgrades in select PSBs as key drivers for this improvement. The study noted that PSBs remained relatively more efficient than private banks, with the exception of the period between fiscal years 2019 and 2022, which may have been impacted by mergers and the rationalization of businesses, branches, and employees.

Meanwhile, private sector banks recorded an improvement in efficiency to over 86 percent in fiscal year 2026 from approximately 78 percent in fiscal year 2020. Foreign banks maintained an efficiency range of 83 to 85 percent across the same timeframe. The paper highlighted that the performance of public sector banks has positioned them better compared to private lenders over the preceding three years, specifically from fiscal year 2024 to fiscal year 2026.

Within the public sector segment, State Bank of India performed relatively better with a score of 97.49 percent during the full sample period, followed by the Bank of Maharashtra at 90.49 percent. Among private lenders, HDFC Bank recorded a score of 97.54 percent, followed by IDBI Bank at 96.51 percent. For foreign banks, HSBC and JPMorgan recorded a score of 1, holding the top positions during the study period, followed by Citibank, HDFC Bank, and State Bank of India.

Looking toward the long term, the paper projected significant transformations in the Indian banking sector driven by hyper-personalization through artificial intelligence tailored to younger demographics. It noted a potential shift from reactive to proactive service models aimed at deepening customer relationships and institutional loyalty. The authors suggested that banks will increasingly focus on data-driven customer experiences, AI automation, and robust data security.

Additionally, the paper noted that the creation of foundational AI models is expected to accelerate in multilingual markets like India, enabling banks to support multi-language onboarding and service customization. The report reaffirmed a positive long-term macroeconomic outlook for India, supported by stable sovereign ratings, high savings rates, foreign exchange reserves exceeding $700 billion, and cash-rich corporate balance sheets.

"This EAC-PM working paper offers valuable data on the structural transformation of India's banking sector. The measured efficiency gains in public sector banks highlight the tangible impact of sustained capital infusion and technology adoption. For the broader business and startup ecosystem, a well-capitalized and efficient banking system is crucial for credit availability, supporting long-term economic growth and enterprise development across the country." — Dr. Shishir Gupta, Founder & CEO, StartupLanes