Public sector banks in India are making a strong comeback! For the first time since March 2010, these banks, known as PSBs, posted double-digit growth in their advances at 12.2% year-on-year during FY25. That’s impressive, especially since it outpaced the 9.5% growth seen in private sector banks, or PVBs, according to a fresh report from Systematix Group.
PSBs used to dominate the lending market with a whopping 74.9% share back in March 2011. But that slipped to 51.8% by March 2024 due to stiff competition. Now, with this surge in credit growth, PSBs are closing the gap and showing real momentum in the Indian banking sector.
However, not everything’s perfect. Deposits have trailed advances for three straight years, pushing up credit-to-deposit ratios across the board. The good news? PSBs hold an edge in liquidity over their private rivals, giving them a solid buffer.
Looking ahead, research firm CRISIL predicts the overall banking sector’s advances will grow 11-12% in FY26, even with US tariffs hitting exports. This optimism stems from the RBI’s push to boost liquidity and the government’s steps to fuel economic growth in India.
On the deposit front, PSBs held their ground in FY25, with just a tiny 56 basis point drop in market share. They fended off tough competition from giants like HDFC Bank by expanding branches after years of cutbacks. Plus, households trust PSBs more—making up 67.6% of their deposits compared to only 52.1% for private banks. This has really helped mobilize savings and strengthen their position.
Asset quality is another win for PSBs. The difference between PSBs and PVBs has almost vanished over the past five years. PSBs have leaned on technology to sharpen their loan underwriting, keeping bad loan slippages low. They’ve also built up provisions aggressively to tackle risks, bringing them on par with private peers.
Profitability got a big lift from recovering loans that were technically written off. In FY25, these recoveries added 18% to 22.8% to return on assets for most PSBs, with some banks doing even better. Systematix says this trend looks sustainable, though it might slow a bit in the coming years.
To diversify income, PSBs are now pushing sales of insurance, mutual funds, and other third-party products. Training staff and tech upgrades are paving the way for this exciting shift, boosting non-interest revenue streams.
Finally, net interest margins (NIMs) faced pressure from RBI’s repo rate cuts, squeezing profits system-wide. But PSBs handled it better than PVBs, thanks to less reliance on external benchmark loans and smarter deposit pricing. With more relief from CRR cuts on the horizon, experts expect NIMs to steady up by late FY26, keeping the Indian banking sector on a positive track.
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