PSU bank stocks watch: Budget 2026 governance bill

PSU banks back in focus before the Budget

Shares of major public sector banks (PSU banks) including Bank of Maharashtra, Punjab National Bank, Bank of India and State Bank of India (SBI) are expected to remain in focus. The trigger is a report by NDTV Profit that the government may propose a Banking Governance Bill during the Union Budget 2026 presentation. The market is tracking the update because governance reforms can change how PSU banks take decisions, attract talent and deploy capital.

What is being reported about the Banking Governance Bill

According to NDTV Profit, the proposed legislation aims to strengthen professionalism, competitiveness and technology adoption across public sector banks. The Bill may address board composition, accountability standards and gaps in pay structures between public and private sector banks. Sources also indicated that it could include measures enabling PSU banks to finance large projects more efficiently, rather than focusing primarily on safeguarding public deposits. The government’s stated longer-term objective, as cited in the report, is to make PSU banks more competitive by Vision 2047.

Timeline: not immediate, but a Budget signal matters

Reports suggest the Banking Governance Bill is still being finalised and could take another 3 to 4 months before it is ready for introduction in Parliament. Even so, a formal mention during the Budget proceedings would be read as an intent to move ahead with a structural reform for the sector. Investors typically react to such signposts, especially when they relate to governance, incentives and autonomy at state-run lenders.

FDI limit debate adds another layer of uncertainty

Alongside governance reform, discussions may include raising the FDI limit in PSU banks from the current 20%, according to the earlier report. But a separate update in the supplied material shows the government publicly denied any proposal to raise the foreign direct investment (FDI) limit in public sector banks to 49% from 20%. That denial, attributed to Minister of State for Finance Pankaj Chaudhary, came when PSU bank shares were trading with notable losses.

Market moves cited in the reports

One report stated that PSU bank stocks declined up to 6% on the FDI-related denial, with NIFTY PSU Bank down 2.5%. The top loser was Indian Bank (down 5.67%), followed by Punjab National Bank (down nearly 4%) and Bank of India (down over 3%). In another update, PSB shares rallied, with the Nifty PSU Bank index rising 2% and SBI hitting a new high of ₹988.95, gaining 2% in intra-day trade. The same report listed Indian Bank, Bank of Maharashtra, Bank of Baroda, Central Bank of India and Canara Bank among gainers, up 2% to 3%.

Credit growth remains a key support for the sector

RBI data cited in the material showed banking system advances growing nearly 12% year-on-year and 4.5% quarter-on-quarter as of mid-December 2025. Growth improved across segments, including micro and small enterprises, services and retail loans. Brokerage commentary also pointed to an environment where larger banks with strong liability franchises may be better positioned.

Brokerage preferences and sector positioning for the quarter

Across brokerage reports of Systematix, YES Securities and Elara Capital, 10 banking stocks emerged as consistent picks or preferred names for the quarter ahead: ICICI Bank, Axis Bank, HDFC Bank, Kotak Mahindra Bank, SBI, Bank of Baroda, Indian Bank, Ujjivan Small Finance Bank, DCB Bank and City Union Bank. Elara’s view in the supplied text highlighted a preference for large private banks such as ICICI Bank and Kotak Mahindra Bank, along with SBI among PSU lenders, tied to the value of strong liabilities.

Margins, rate cuts and why PSU banks are being watched

One commentary said the system that expected Q2FY26 to mark the bottom for narrowing margins may see another 20 to 25 basis points compression if the RBI goes ahead with a 25 bps rate cut. The same section argued PSU banks are better cushioned because only 35% of their loan books are linked to external benchmarks like the repo rate, compared with over 50% for private banks. It also stated net NPAs at PSU banks are now around 0.7% versus 2% to 3% about 4 to 5 years ago, supporting lower provisioning needs.

Bank of Baroda: metrics and targets cited

A separate note in the provided text highlighted Bank of Baroda (BoB) as a value-oriented PSU bank idea with improving operations. It stated BoB is trading at a trailing twelve-month P/B of 0.92x and delivered a 15% return over the past year, compared with the Nifty 50’s 7.6%. The note cited CASA at 38.4%, gross and net NPA at 2.16% and 0.57%, and credit cost at 0.29%, along with CRAR at 16.54%. It also proposed a 3-month target of ₹300 (around 6% upside) and a 12-month target of ₹350 (around 24% upside) based on a 1.0x FY27E BV multiple.

Regulatory backdrop: RBI’s proposed ECL framework

The material also referenced RBI’s proposal to replace the incurred-loss provisioning framework with an expected credit loss (ECL)-based provisioning. The draft directions aim to strengthen credit risk management practices and promote comparability across financial institutions. RBI Governor Sanjay Malhotra was cited as saying the ECL framework is proposed to be applicable from April 1, 2027, to Scheduled Commercial Banks excluding small finance banks, payment banks, regional rural banks and all India financial institutions.

Key facts at a glance

What investors will track next

The Budget speech and accompanying Economic Survey are expected to provide more clarity on how governance reforms align with economic priorities for FY27 and beyond. Separately, investors are likely to watch for any concrete timeline or draft details on the Banking Governance Bill, given the report that it may take 3 to 4 months to be ready for Parliament. With mixed headlines on FDI limits, the market’s focus may stay on what is formally communicated versus what remains under discussion.

FAQs

1. Why are PSU bank stocks in focus today?
   Reports said the government may propose a Banking Governance Bill during the Union Budget 2026 presentation, which could alter governance and operating norms for PSU banks.

2. What changes could the Banking Governance Bill cover?
   The report cited areas such as board composition, accountability standards, technology adoption and pay structure gaps between public and private sector banks.

3. Is the FDI limit in PSU banks expected to rise?
   The supplied material includes both discussion of a possible FDI increase from 20% and a separate statement that the government is not considering a proposal to raise it to 49%.

4. What does RBI’s ECL proposal mean for banks?
   Under the expected credit loss framework, banks recognise expected losses at loan origination, and RBI proposed making it applicable from April 1, 2027 for most scheduled commercial banks.

5. Which banking stocks were cited as preferred picks by brokerages?
   Systematix, YES Securities and Elara Capital reports cited ICICI Bank, Axis Bank, HDFC Bank, Kotak Mahindra Bank, SBI, Bank of Baroda, Indian Bank, Ujjivan SFB, DCB Bank and City Union Bank.