how-ai-powered-banking-can-help-public-sector-banks-scale-for-a-us-32-trillion-india

How AI can scale public sector banks for a US$32 trillion India

Pratik Shah, Partner and National Leader – Financial Services, EY India
Pratik Shah

Partner and National Leader, Financial Services, EY India

4 minute read 22 Oct 2026
Related topics
AI
Digital
Technology
Risk
Consulting

The paper explores how AI-powered banking can accelerate public sector bank transformation and support the Viksit Bharat vision.

 In brief

  • AI-led banking transformation can improve customer engagement, decision-making, workforce capabilities and operational efficiency.
  • The EY PSB.AI framework shows how public sector banks in India can use AI to scale growth, productivity, inclusion and trust.

India’s public sector banks (PSBs) have emerged from a decade of balance sheet repair with stronger financial foundations. The next phase of public sector bank transformation must focus on building the scale, productivity and customer relevance required to support the Viksit Bharat vision.

EY analysis indicates that India’s economy could expand 8.1 times by 2047, requiring banking assets to grow 12–14 times. To keep pace, PSB assets may need to grow at approximately 13.5% CAGR, potentially placing several public sector banks in India among the world’s top 100 banks by scale. This growth must be accompanied by a six-to-eight-fold improvement in employee productivity, while sustaining asset quality that is currently at its strongest level in a decade.

AI-powered banking can help address these imperatives together. By combining intelligent automation, data-led decision-making and workforce augmentation, AI can help banks expand without proportionately increasing headcount, infrastructure and operating complexity.

PSB.AI: A framework for public sector bank transformation

EY presents the PSB.AI framework, bringing together five connected shifts required to accelerate public sector bank transformation:

  1. Primacy: Become the first institution customers approach for any financial need through trusted, personalized and always-on relationships.
  2. Smart capacity: Apply AI, automation and process redesign to remove low-value work and create capacity for growth.
  3. Bharat impact: Extend profitable financial services to MSMEs, farmers, women and emerging customer segments.
  4. Augmented workforce: Combine human judgement with AI-enabled intelligence, speed and contextual guidance.
  5. Integrity and trust: Embed explainability, accountability and responsible AI into every AI-enabled decision.

Together, these pillars provide an integrated agenda through which public sector banks in India can improve customer relationships, release capacity, expand inclusion, empower employees and manage AI-related risks.

Using AI-led banking to build customer primacy

By 2035, Gen Z could constitute 47% of India’s workforce and drive nearly US$2 trillion in consumer spending. These customers will expect responsive service, personalized products, simple communication and greater transparency.

AI-led banking transformation can create a dynamic understanding of individual needs. Banks can move from generic product campaigns to relevant next-best actions delivered through the right channel at the right time. EY estimates that this approach could improve customer-deepening metrics, such as products per customer, wallet share and deposits per customer, by 15% to 20%.

Creating smart capacity across banking operations

One of the most significant opportunities in AI-enabled public sector banks lies in releasing employee capacity. AI could automate 70% to 90% or more of the time spent on standardized, low-stakes credit activities such as application checks, document authentication and policy verification. In higher-stakes activities, AI can prepare the analysis while retaining human approval and accountability.

Across the lending journey, more than 15 coordinated AI agents could release over 60% of relationship-manager capacity and more than 80% of credit-processing capacity. These gains could enable public sector banks in India to scale lending while retaining human judgement for complex or high-impact decisions.

Extending profitable financial inclusion across Bharat

A critical objective of AI-enabled public sector banks’ transformation is to make financial inclusion commercially sustainable. AI can analyze cash flows, UPI activity, repayment behavior, seasonality and other alternative indicators to identify viable customers and assess repayment capacity. It can also improve branch productivity by helping frontline teams identify whom to approach, what proposition to offer and when to engage.

For public sector banks in India, this could make smaller and geographically dispersed accounts more economical to originate and service.

Improving collections and portfolio quality

AI-led banking transformation can strengthen collections through predictive risk identification, personalized outreach, optimized contact strategies and real-time guidance for field officers. Across a typical portfolio, the report estimates that these interventions could reduce flow-to-NPA by 15% to 20% percentage points, collections costs by 20% to 30% and credit costs by 15% to 20%.

This capability will be central to public sector bank transformation, particularly as banks expand credit among new-to-bank, new-to-credit and underserved customer groups.

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Building an AI-augmented workforce with trust

More than 90% of the PSB workforce operates in branches, making workforce enablement essential. In future-ready banking, AI can support employees during onboarding, transfers, customer engagement, credit assessment and career development. The objective is not to replace human judgement but to make institutional intelligence available to employees at every branch and moment of decision.


However, AI also introduces risks related to bias, privacy, cybersecurity, model failure, conduct and unexplained decisions. Responsible AI-powered banking therefore requires clear accountability, human oversight, independent validation, bias testing and continuous monitoring.


Way forward

Through the PSB.AI framework, public sector bank transformation can move beyond incremental digitization towards a fundamentally future-ready banking, new operating model, enabling banks to combine their longstanding strengths of trust and reach with the intelligence, agility and scale needed to support a US$32 trillion economy.

Learn more about AI-powered banking transformation in India

Download the full pdf

PDF (4 MB)

Summary 

As India advances towards its Viksit Bharat ambition, the challenge facing public sector banks in India is no longer limited to growth. Banks must scale assets, improve productivity, deepen financial inclusion and maintain strong asset quality, often simultaneously.

How EY can help

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About this article

Pratik Shah, Partner and National Leader – Financial Services, EY India
Pratik Shah
Partner and National Leader, Financial Services, EY India
Pratik advises financial institutions on growth and transformation. Outside work, he enjoys pickleball, powerlifting, and exploring new cuisines.
Related topics
AI
Digital
Technology
Risk
Consulting

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.