It further said that the market share of private sector banks is projected to rise to about a third by 2025 from just over 12 per cent in 2000, while the foreign banks would continue to remain marginal players.
"The market share of the public sector banks will decline from 80 per cent in 2000 to just over 60 per cent in 2025," the report said.
"Public sector banks will continue to face the dual problem of significant asset quality stress and slender capitalisation, impacting their growth, unless major governance changes occur and the government is willing to dilute its stake so that the burden of raising additional capital falls more lightly on the government," it said.
The report added that overseas institutional investors, with deeper pockets would not invest in public sector banks in the absence of such governance changes and possibility of improvement in productivity.
On the other hand, it said that private sector banks are likely to improve performance and increase market share because they have been more "nimble and sustained in using new technologies to underpin their business models".
The report added that they will continue to exercise a lead which could further accentuate the divide with public sector banks.
A range of Internet banking applications has already begun moving to the mobile handset, with innovative applications offering customer convenience.
"Even though the public sector banks have demonstrated their ability to catch up on new technology absorption, their lags in doing so are likely to enable private sector banks to capture market share more rapidly," it said.
Currently, there are over 27 public sector banks, over 15 private sector lenders and 30 foreign banks in India.