Public Sector Banks (PSBs) have reported their first double-digit credit growth in 15 years, surpassing private sector lenders in FY25. According to a Systematix report, PSB advances grew 12.2% year-on-year, compared to 9.5% for private banks. The revival is supported by recoveries from written-off accounts, branch expansion, and stronger household deposit mobilization. With margins expected to stabilize on the back of CRR cuts, the report signals that PSBs are regaining momentum after years of market share erosion.
Core Development
For the first time since March 2010, PSBs outpaced private peers in loan growth, posting 12.2% YoY advances in FY25. Private sector banks grew at 9.5% during the same period.
Although PSBs’ share of advances had fallen from 74.9% in 2011 to 51.8% by 2024, FY25 marked a turning point. The credit-to-deposit ratio has remained stretched, but PSBs retained their deposit market share, losing only 56 basis points despite stiff competition from HDFC Bank.
Key Drivers / Issues
Several factors contributed to PSBs’ resurgence:
Household deposits form 67.6% of PSB deposits, compared to 52.1% for private banks.
Recoveries from written-off accounts boosted profitability, contributing 18–22.8% to return on assets.
Greater reliance on technology-driven underwriting has narrowed the asset quality gap with private banks.
Expansion in selling insurance, mutual funds, and third-party products is diversifying income streams.
Stakeholder Impact
For PSBs, the credit revival provides much-needed confidence and profitability. Borrowers benefit from wider credit access as PSBs expand reach through new branches. Investors gain optimism as asset quality improves and returns strengthen. For the banking system, stronger PSBs reduce systemic risks and balance competitive dynamics with private lenders.
Industry & Policy Reactions
CRISIL projects overall credit growth for the banking sector at 11–12% in FY26, supported by RBI’s liquidity measures and government-driven economic expansion. Analysts view PSBs’ recovery as sustainable, though growth may moderate.
Challenges Ahead
Sustaining double-digit growth amid high credit-to-deposit ratios.
Managing profitability with continued NIM pressure from repo rate cuts.
Ensuring branch-led expansion does not strain operating efficiency.
Maintaining asset quality as lending expands into newer segments.
Strategic Outlook
PSBs appear better positioned than in the past decade, leveraging technology, recoveries, and non-interest income to strengthen balance sheets. With margins set to stabilize later in FY26 and asset quality risks narrowing, public lenders could continue to challenge private peers, reshaping the banking sector’s competitive landscape.
Why This Matters
The revival of PSBs after years of underperformance underscores a shift in India’s banking sector. Sustained growth by public lenders strengthens financial inclusion, credit availability, and overall sector stability, balancing the dominance of private banks.
