First Time Since 2011: PSU Banks Outpace Private Banks in Loan Growth in FY25

For the first time since 2011, public sector banks (PSBs) have surpassed private sector banks (PVBs) in loan growth. The development reflects shifting momentum in India's banking landscape, with PSBs gaining market share across retail and corporate segments.

First Time Since 2011: PSU Banks Lead in Loan Growth FY25

At the close of FY25, PSBs recorded a year-on-year loan growth of 13.1%, compared to 9% for PVBs. This 4% gap is the largest in favour of PSBs since 2011, according to data from the Reserve Bank of India and Bernstein. The performance was driven by growth across traditional lending categories like mortgages and corporate loans, as well as non-mortgage segments such as auto finance.

This change contrasts with the historical trend, where private banks consistently outperformed their public counterparts by 6% to 7%, leading to higher valuations and investor preference.

Shift in Competitive Landscape

The stronger performance by public sector banks (PSBs) has attracted attention in the market. If PSBs continue to close the growth gap, it could challenge the premium valuations traditionally associated with private banks. Although private banks still maintain higher profitability and operational efficiency, their historical growth advantage appears to be under pressure.

There are signs of growing competition, as large and aggressively priced PSBs make it more difficult for private banks to sustain growth. This is particularly evident in the increasing pricing pressure in large-ticket corporate and SME loans.

Read More: After RBI’s Rate Cut, These 4 Public Sector Banks Cut Lending Rate – Find Out Which Ones! 

Loan Base and Market Share Comparison

Despite already managing larger portfolios, PSBs have expanded their books more rapidly. At the end of FY25:

• PSB loan base: ₹98.2 lakh crore (52.3% market share)
   
• PVB loan base: ₹75.2 lakh crore (40% market share)

This expansion highlights the scale at which PSBs have operated, particularly in growing their corporate loan books by 10%, whereas PVBs grew by less than 4%. This figure includes negative corporate loan growth from key private institutions like HDFC Bank and IndusInd Bank.

Retail Lending and MCLR Advantage

PSBs also saw strong traction in retail lending. The top 5 PSBs expanded their retail loan portfolios by over 22% in FY25, compared to under 12% growth reported by PVBs. This rapid expansion is particularly noteworthy given the conservative approach historically associated with public sector lenders in retail markets.

One structural advantage working in favour of PSBs is their higher proportion of marginal cost of lending rate (MCLR) linked loans. PSBs have an MCLR share between 52% and 60%, which reprice with a lag, giving them an edge in managing net interest margins amid changing interest rate cycles. In contrast, private banks benefited earlier from savings rate cuts but now face margin equalisation.

Conclusion

FY25 marked a turning point in India's banking sector as PSU banks posted higher loan growth than private sector banks for the first time in 14 years. With gains across both corporate and retail segments, and strategic advantages in MCLR-linked loans, public sector banks have challenged long-standing dominance in lending growth. The shift has implications for market positioning, profitability expectations, and valuation differentials across the sector.

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