The PSU Bank index is set for its best year since 2014 but still away from its peak

India's index of state-run banks has gained over 60 percent this year and is on course for its best annual performance since 2014, during which it had gained nearly 70 percent.

The state-run lenders have had a strong run off-late with their market capitalisation crossing the Rs 10 lakh crore mark for the first-time ever late last month.

Despite the recent rally, the index is still 31 percent away from its all-time high of 5,375 that it made in 2010.

On November 18, the government announced that PSU Bank heads may be appointed for a five-year term, which can be extended by another five years. Historically, the average tenure of a PSU Bank CEO had only been three years.

In an interview with CNBC-TV18, former RBI Deputy Governor SS Mundra said that the move was much needed considering the circumstances. With most banks introducing an accelerated promotion system, there is more certainty within PSU banks now.

Indian Banks Association CEO Sunil Mehta said that stability of tenure will aid in executing a long-term strategic goal. However, anomalies have been corrected with new conditions.

“Stability of tenure will always help a CEO to execute a long-term strategic goal because with the change of incumbency the priorities keep changing,” he said.

According to data obtained under the Right to Information ACT (RTI), the borrowers of Mudra loans have paid their EMIs to banks. In over seven years since its launch, NPAs of banks for Mudra loans, including those extended during the pandemic when small businesses were the worst hit, are lower than the average NPAs of the sector as a whole.

Even on the overall bank front, asset quality has been better than it was over many years. State Bank of India's gross NPA during the September quarter was the best in seven years. Same is the case with Bank of Baroda, where the gross and net NPAs were the best in 29 and 30 quarters respectively.

Despite rising interest rates, credit offtake rose 13.6 percent to Rs 32.9 lakh crore as of October 2022 on a year-on-year basis, compared to just 3.3 percent growth a year-ago.

Experts attributed this as a reflection of the nominal GDP growth rather than the real GDP. Base effect also had a role to play. Analysts further said that with corporate deleveraging more or less over, the system is seeing a build up of working capital.

Rahul Chadha of Mirae Asset Global Investment said that PSU Banks were clearly underowned earlier but they like banks like SBI and Bank of Baroda within the state-run banks.

Bernstein recently initiated coverage on State Bank of India with an outperform rating and a price target of Rs 700. It termed India's largest lender as a sector proxy that benefits from its strong deposit franchise and favorable sector tailwinds.

BofA Securities in a note said that they see meaningful room for re-rating in Bank of Baroda as investor perception improves with consistent earnings delivery.