Public sector banks (PSBs) have awakened the giant within, going by the assiduous manner in which they have been growing their business over the last few years. And the numbers tell the story.

According to the RBI’s latest report on the quarterly basic statistical return (BSR) from scheduled commercial banks (SCBs), PSBs recorded credit growth of 14.1 per cent year-on-year (yoy) during December 2025, which is higher than the overall bank credit growth of 12.2 per cent.

The central bank highlighted that PSBs have consistently outpaced private sector banks (PVBs) in credit growth in the last five quarters.

Further, the deposit growth (yoy) of PSBs improved to 9.9 per cent in December 2025 from 9.1 per cent last year, while for PVBs it decelerated by 2.1 percentage points to 11.3 per cent.

The rebound

State-owned banks have shaken off the singeing effects of the 2014-15 asset quality review (AQR), which had led to a spike in their non-performing assets (NPA) and provisioning.

Further, the 11 PSBs (out of the then 20) that faced business restrictions after being placed under the RBI’s so-called Prompt Corrective Action (PCA) framework (due to high NPAs, insufficient capital and negative return on assets) during 2017-18 successfully exited the framework during 2019-22.

At the time the banks were under the PCA framework, their operations were hobbled by restrictions, including credit expansion for borrowers below certain rating grades and unrated borrowers, and a reduction in risk assets, unsecured exposures and loan concentration.

However, a major consolidation among several PSBs seems to have enhanced their competitiveness, strengthening their ability to take on more risk and larger ticket-size loans. Vijaya Bank and Dena Bank merged with Bank of Baroda with effect from April 1, 2019. And with effect from April 1, 2020, Oriental Bank of Commerce and United Bank of India merged with Punjab National Bank; Syndicate Bank merged with Canara Bank; Andhra Bank and Corporation Bank merged with Union Bank of India; and Allahabad Bank merged with Indian Bank.

Sanjay Agarwal, Senior Director, Care Ratings, observed that due to the AQR and PCA, the credit-deposit (CD) ratio of PSBs fell, but they built up surplus statutory liquidity ratio (SLR) securities — namely government securities (G-Secs) and state government securities (SGS).

“Now, in the last couple of years, private sector banks have been more worried about deposit growth, NIM (net interest margin), etc. So they have not really focused on credit growth,” he said.

More headroom

Agarwal noted that the relatively lower CD ratio and surplus SLR have given PSBs headroom to grow their credit portfolio, even as deposit growth lags credit growth.

SLR is the portion of deposits that banks have to necessarily invest in G-Secs and SGS. For every ₹100 deposit that a bank mobilises, it has to park ₹18 in SLR securities.

The differential between credit growth and deposit growth widened to 170 basis points (bps) as at December-end 2025, from 80 bps as at December-end 2024.

“PSBs were in a state of turmoil for about a decade up to 2022-23. Now, post AQR, PCA and consolidation, they have settled and started delivering,” Agarwal said.

Despite deposit growth falling behind credit growth, State-owned banks have built up a robust corporate loan book. The lenders that have disclosed their corporate loan sanctions pipeline (up to December 2025) include State Bank of India (₹7.86 lakh crore), Punjab National Bank (₹1.02 lakh crore), and Bank of Baroda (₹75,000 crore).

Ashwini Kumar Tewari, Managing Director, SBI, in a recent analyst call, observed that SBI is seeing a pick-up in corporate loans, especially in the power, including renewables, metals and infrastructure sectors.

Overcoming inhibition

Madan Sabnavis, Chief Economist, Bank of Baroda, underscored that PSBs have turned proactive in mobilising resources via bulk deposits and certificates of deposit as they have a long corporate loan pipeline to finance.

He also noted that due to AQR, State-owned banks had cleaned up their books, which helped them accelerate their lending in the retail and MSME (micro, small and medium enterprises) segments, with no small help from technology, which is proving to be a differentiating factor.

“So, earlier, private sector banks were ahead because public sector banks were trying to clean up their balance sheets. This scenario prevailed right up to 2021-22.

“Now, PSBs are on a firm footing, having cleaned up their balance sheets and turned healthy. They don’t have inhibitions about lending, which was there earlier. Therefore, they’re very aggressive in the retail and MSME segments,” Sabnavis said.

The stock markets have raised a toast to the PSBs, baking in the strong credit growth, improved asset quality, sustained profitability, and healthy balance sheet, among other factors, in their valuation. The BSE PSU Bank index (comprising 11 PSBs) shot up 69 per cent y-o-y as on February 27, 2026. The BSE Private Banks index (comprising 12 PVBs) rose 19 per cent y-o-y.

More Like This

Published on March 2, 2026