Rhetoric to Reality, How PSBs Outperformed Private Banks and What Comes Next
Usually when government officials shower praises on Public Sector Banks, 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.
This is not just a blip. It represents a fundamental shift in the relative performance of India’s banking sector, with implications for the economy, for taxpayers, and for the future of banking reform.
The Numbers Tell the Story
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. This is not a marginal difference; it is a significant outperformance.
PSBs’ low credit-deposit ratios, at 70-75 per cent by end-2025 (compared to 80-85 per cent for private banks) have allowed them greater headroom to lend. When deposits outpace loans, banks have capacity to expand credit without straining their balance sheets. PSBs have that capacity; private banks are closer to their limits.
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. CASA deposits are the cheapest source of funding for banks; retaining them provides a durable cost advantage.
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. For borrowers, this difference matters. For banks, it reflects a structural advantage in funding costs.
Asset Quality Improvements
They have pulled ahead on asset quality, too. As gross Non-Performing Assets of banks contracted by over 12 per cent in the December quarter, PSBs accounted for a significant share of this improvement. Credit quality is not just about the stock of NPAs but also the flow of new slippages, and PSBs are showing discipline.
This has led to PSBs gaining a 52 per cent share in the ₹1 lakh crore profit pool of domestic banks. For the first time in years, public sector banks are not just surviving but thriving. They are generating returns, building capital, and contributing to the exchequer rather than drawing from it.
As a result, the Centre has been able to cut the apron strings on recapitalising PSBs, allowing them to tap markets for capital needs. The era of repeated bailouts, of budget allocations for bank recapitalisation, may be ending. PSBs are standing on their own feet.
The Sustainability Question
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. The current performance is partly cyclical, not entirely structural.
However, there seem to be no big asset quality worries for PSBs because corporate and MSME borrowers maintain good balance sheet health. The corporate sector has deleveraged. Companies are carrying less debt relative to their earnings. This reduces the risk of a new NPA wave.
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. The recent controversies around mis-selling of third-party products have largely involved private sector banks. PSBs have stuck to basics, and that prudence is paying off.
The Challenges Ahead
To maintain their current asset quality, PSBs need to improve their underwriting capabilities before the next corporate capex boom arrives. Credit decisions cannot rely on legacy practices; they must evolve.
This would require tech and AI adoption in mining borrower data, loan evaluation and monitoring. The tools of modern banking—data analytics, machine learning, automated monitoring—are not optional extras; they are necessities. PSBs must invest in these capabilities.
Governance reforms that usher in longer tenure and greater accountability for PSB chairs and boards, and performance-based pay for staff, are needed for efficiency gains. The current governance structure, with its frequent transfers and limited autonomy, is not optimal for long-term performance.
The Right Policy Direction
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. The merger spree of recent years was disruptive; another round would be destabilising. Consolidation for its own sake is not a strategy.
Instead, the focus should be on strengthening what exists: better governance, better technology, better underwriting. The panel can examine these issues and recommend reforms that build on the current momentum rather than disrupting it.
Conclusion: From Rhetoric to Reality
For years, the promise of PSB turnaround was just that—a promise. Now, for the first time, the performance matches the rhetoric. PSBs are not just talking about improvement; they are delivering it.
The challenge is to sustain this performance, to build on it, to ensure that this is not a temporary cyclical upswing but a permanent structural improvement. That will require continued discipline, continued investment, and continued reform.
But for now, the banking sector has reason to celebrate. The public sector banks, once written off as hopelessly inefficient, are showing what they can do when given the right conditions and the right incentives. It is a remarkable turnaround, and it deserves recognition.
Q&A: Unpacking the PSB Performance
Q1: How did PSBs outperform private banks in the December 2025 quarter?
PSBs achieved loan growth of 14-15% compared to 11-12% for private banks. Their lower credit-deposit ratios (70-75% vs 80-85%) provided greater lending headroom. They retained CASA deposits better as households shifted to market investments, giving them cheaper funding. This enabled aggressive loan pricing at 8.43% weighted average rates versus private banks’ 10%.
Q2: What about asset quality?
As gross NPAs contracted by over 12% in the December quarter, PSBs accounted for more than 18% of the improvement while private banks managed only 4% growth in loan books. PSBs now hold a 52% share of domestic banks’ ₹1 lakh crore profit pool. Corporate and MSME borrower balance sheets remain healthy, reducing near-term asset quality concerns.
Q3: How has this affected government support for PSBs?
The Centre has been able to reduce recapitalisation support, allowing PSBs to tap markets for capital needs. The era of repeated budget allocations for bank bailouts may be ending as PSBs generate sufficient profits to build capital internally. This represents a significant fiscal relief.
Q4: What challenges remain for PSBs?
PSBs need to improve underwriting capabilities before the next corporate capex boom. This requires tech and AI adoption in borrower data mining, loan evaluation, and monitoring. Governance reforms are needed for longer tenure and greater accountability for chairs and boards, along with performance-based pay for staff.
Q5: What is the right policy direction going forward?
The Centre is on the right track in not proposing another round of PSB mergers and instead evaluating deeper reforms through a high-level panel. Consolidation for its own sake is not a strategy; the focus should be on strengthening governance, technology, and underwriting to sustain and build on current momentum.
