The paper analyzes the performance of public sector banks in India during the post-liberalization period. There has been a significant improvement in the performance of public sector banks after reform measures. The paper has used various accounting ratios pertaining to profitability, financial efficiency, operational efficiency and financial soundness to build performance index for banks. Principal Component Analysis method has been used to construct index and rank performance of banks over the last 10 years. Twenty-two parameters pertaining to operational and financial efficiency of banks have been considered to construct the performance index for public sector banks. Altman Z-Score of solvency analysis has been applied to banking sector with suitable financial, operational and other efficiency ratios. Logit model is used to construct the Altman Z-Score for public sector banks in India. The logit model is found to be robust as per its predictability of financial health of the public sector banks. It is found that reform measures have impacted positively in enhancing the stability and soundness of the public sector banks in India. The analysis has found that State Bank of India continues to be the number one bank in India and there is competition between Punjab National Bank, Canara Bank, Bank of India and Bank of Baroda for the number two place in different years.

Prior to reforms, the Indian banking sector was functioning in a highly-regulated environment. Controlled interest rate, pre-emption of credit, high Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) requirements were putting pressure on efficiency and financial stability of the banking sector. Profitability of Indian banks was extremely low despite rapid growth in deposits. The survival of the Indian banking system was questioned as a consequent of erosion of capital, which led to the appointment of the new Committee on Financial System (CFS) in 1991. Pursuant to the recommendations of the Committee, gradual reform measures were initiated to improve efficiency, productivity, competition and stability of the banking sector. Basel Committee recommendations have been implemented in a phased manner so as to align Indian banks with international best practices. At present, Indian public sector banks are performing well and they are at par with the best banks in the world. The paper has carried out a performance analysis of public sector commercial banks using Principal Component Analysis (PCA) and logit model. It has ranked the public sector banks as per their performance indices and financial health over the last 10 years.

Government intervention in the banking sector had its origin in nationalist thinking. Colonial banking was perceived to be biased in favor of the working capital loans to trade and large capitalist enterprises and against rural areas and the common man. This legacy combined with socialist ideology culminated in the nationalization of all the large banks in 1969. The nationalized banks have explicitly set quantitative targets to expand their network in rural areas and to direct credit to priority sector. Over time, banks also became a major source of lending to the government and thus of financing fiscal deficits. By 1991, the country had created an unprofitable, inefficient and financially unsound banking sector. The profitability of Indian banks was extremely low in spite of the rapid growth of deposits. The Indian banking sector was operated under a highly regulatory environment. The banking system had serious survival problem due to lack of profit and consequent erosion of capital. Besides these, low internal and organizational efficiency and lack of competition were other factors, because of which the banking sector in India had to face the problem of survival.

Bank Management Journal, Public Sector Banks in India, Principal Component Analysis Method, Indian Banking Sector, Nationalized Banks, Logistic Regression, Commercial Banks, Banking Sector Reforms, Operational Ranking, Punjab National Bank, United Bank of India, Canara Bank.