Tracking India's Public Sector Banks

Groww's new Nifty PSU Bank ETF aims to mirror the performance of its benchmark index, offering investors a passive way to tap into India's public sector banking sector. This sector includes major players like State Bank of India (SBI), Bank of Baroda, and Punjab National Bank, which are vital for providing credit across the nation. As of February 25, 2026, the Nifty PSU Bank Index showed strong recent performance, gaining 67.63% in the past year and delivering an annualized return of 32.73% over five years. The index is dominated by larger banks, with SBI making up over 34% of its weighting and Bank of Baroda around 13.6%. The ETF provides a cost-effective, rules-based method to invest in these government-owned financial institutions. The fund aims to track the index's total return, allowing direct investment in its component stocks. The New Fund Offer (NFO) runs from March 6 to March 20, 2026.

Sector's Financial Health and Valuation Puzzle

Public sector banks have undergone a significant financial recovery. By fiscal year 2025, their capital adequacy reached 16.1%, up from 11-12% in earlier years. The ratio covering potential loan losses also improved, exceeding 94%. Measures like return on equity and return on assets have risen, showing better operational performance. This financial improvement was driven by loan growth above 10% annually from FY23 to FY25. Consequently, total net profits for PSU banks surged from about ₹31,820 crore in FY21 to ₹1.78 lakh crore in FY25. Despite this strong performance, the Nifty PSU Bank Index currently trades at a Price-to-Earnings (P/E) ratio of 9.75. This is lower than its five-year average of 11.45 and its ten-year average of 20.24. This lower valuation raises a key question: does it signal deep value, or does it mean the sector's rally is already advanced, with most gains already captured? For comparison, the broader Nifty Bank Index has a P/E of about 18, meaning PSU banks trade at a significant discount to private sector peers and the overall banking index.

Reforms, Government Ownership, and Competition

Government policies and reforms have been key drivers of recent gains in public sector banks. Laws like the Banking Laws (Amendment) Act of 2025, the EASE program for operational improvements, and the creation of the National Asset Reconstruction Company Ltd (NARCL) have helped strengthen bank balance sheets and governance. These reforms create a more stable operating environment. However, government ownership means PSU banks can face bureaucratic hurdles and shifting political priorities, unlike more agile private sector banks. The Nifty PSU Bank Index has recently outperformed the broader Nifty 50 index, reflecting this recovery. Investors should also watch for potential sector rotation or changes in market sentiment if economic conditions shift or reform momentum slows. The Groww Nifty PSU Bank ETF has an assumed expense ratio of 0.15%, aiming to be a low-cost option. Other banking ETFs may offer broader diversification.

Potential Risks and Challenges Ahead

Despite clear improvements, a closer look at PSU banks reveals potential challenges. The significant rise in profits, while notable, comes against a history of sector volatility and sensitivity to economic shifts and policy changes. The current low P/E ratio, though historically attractive, may suggest that the market has already factored in much of the expected recovery, leaving less room for further gains. The structural reforms are positive but still new; their long-term success in truly changing PSU banks' operational efficiency and competitiveness against private banks is yet to be fully proven. Past reform efforts have seen progress followed by slowdowns, indicating that consistent growth isn't guaranteed. Historically, concerns have also surfaced regarding government influence on lending or asset quality at state-controlled banks, which could affect investor confidence during uncertain times. With SBI holding a large share of the index, its performance heavily impacts the ETF, creating concentrated risk if SBI faces particular issues.

Outlook: Sustaining Momentum or Plateauing?

The future performance of the Groww Nifty PSU Bank ETF will depend on continued reform efforts and India's overall economic path. Analysts hold mixed views. While acknowledging the sector's financial progress and current valuations, some experts advise caution. They point to questions about whether profit growth can be sustained and if loan growth rates will return to more normal levels after recent highs. Some strategists note that while PSU banks are more efficient, they might lack the innovation and customer focus of top private banks. Investors will be watching to see if the current momentum continues through ongoing improvements, or if the sector is reaching its peak after a strong recovery. As an index-tracking ETF, Groww's fund will reflect the market's evolving view on these factors.