Usually when government officials shower praises on Public Sector Banks (PSBs), this comes off as mere rhetoric. However, recent statements from government officials that PSBs are in good health and can generate aggregate profits of ₹2 lakh crore this year, do ring true. Results for the latest quarter ended December 31, 2025 showed PSBs outshining their private peers; a reversal from the NPA crisis of more than a decade ago.
Capitalising on an improvement in credit offtake, PSBs have managed loan growth of 14-15 per cent this quarter, against 11-12 per cent by private banks. PSBs’ low credit-deposit ratios, at 70-75 per cent by end-2025 (80-85 per cent for private banks) have allowed them greater headroom to lend. Post-Covid, PSBs also managed to hang on to their CASA (current account savings account) base much better than private banks, as households reallocated their savings from deposits to market avenues. PSBs have leveraged this to compete aggressively on loan pricing. RBI data show that weighted average rates for PSBs hovered at 8.43 per cent by December 2025, while private bank loans were much pricier at 10 per cent. They have pulled ahead on asset quality, too. As gross Non -Performing Assets (NPAs) of banks contracted by over 12 per cent in the December quarter, PSBs accounted for much of this reduction. Focussed on MSME, corporate and secured retail loans, PSBs have contained slippages better than private banks (focused on unsecured retail loans) in this cycle. With strong loan growth, falling provisions and treasury income, PSBs managed net profit growth of over 18 per cent in the December 2025 quarter, while private banks managed only 4 per cent growth. This has led to PSBs gaining a 52 per cent share in the ₹1 lakh crore profit pool of domestic banks. As a result, the Centre has been able to cut the apron strings on recapitalising PSBs, allowing them to tap markets for capital needs.
For now, the strong show from PSBs looks set to continue. Yes, as the rate cycle bottoms, treasury gains can peter out; credit-deposit ratios too can remain firm, if credit growth remains strong. However, there seem to be no big asset quality worries for PSBs because corporate and MSME borrowers maintain good balance sheet health. PSBs also retain a strong focus on core banking, without straying off into activities such as pushing market products which have raised regulatory risks at private banks.
To maintain their current asset quality, PSBs need to improve their underwriting capabilities before next corporate capex boom arrives. This would require tech and AI adoption in mining borrower data, loan evaluation and monitoring. Governance reforms that usher in longer tenures and greater accountability for PSB chairs and boards, and performance-based pay for staff, are needed for efficiency gains. Overall, the Centre looks to be on the right track in not proposing one more round of PSB mergers and evaluating deeper reforms through a high-level panel.
Published on February 25, 2026