Scandals to Supremacy: Decoding the PSB revival no one saw coming
Here’s a fun nugget – Heads of public banks in India are so notorious for being wrong about their predictions that folks at Capitalmind built a tracker to mark every instance of State Bank of India publicly claiming “the worst is over” -- when unfortunately, it wasn’t. It has 11 entries spanning 2010-2020. Post that, the tracker hasn't been updated.
Oh, there is an update of SBI reporting massive Rs 7,700 crore losses just next quarter after the tracker’s last update. It’s anybody’s guess why the tracking never resumed.
The “worst is over” quotes were largely about the bank’s profitability, its progress on cleaning up non-performing loans and sometimes, the health of the larger banking industry.
While that was 2020, things seem remarkably different in 2025.
The latest data indicates that public sector banks have turned a corner. Or as Bob Dylan put it -- ‘struck another match, started anew’ (apologies for the poor paraphrase).
PSU banks on the offensive
Even though public sector banks are not the most captivating objects of the public imagination, their soft demeanor shouldn’t be mistaken for weakness.
In a stunning reversal of fortunes, PSBs have left their private sector counterparts behind in credit disbursement growth.
Yes, the same private banks that were high-jumping PSB performance for 14 years straight. The flagbearers of Indian banking indices. The shiny, corporatized private banks that were riding the horses of digitization and used to espouse the virtues of being “lean, mean, lending machines”.
The same private banks, data tells us, were outpaced by PSBs by a whopping 4 percentage points when it comes to growing credit year-on-year. If you don’t think four is big enough, think of the fact that PSBs have much bigger loan books to start with. And they grew faster on that base as compared to private banks growing slower on a smaller book.
Blimey!
If you aren’t convinced yet, the numbers are striking. PSBs clocked 13.1% year-on-year loan growth in FY25 as compared to private banks’ 9%. Moreover, this isn’t a magic gold rush produced by an isolated mania. The disbursals skyrocketed across traditional strongholds like corporate credit as well as newer categories like non-mortgage retail loans and even auto loans.
Economists often refer to the base effect to (mostly for good reason) dampen people’s enthusiasm when they rage on social media that a small country’s GDP rose by 50%. The base effect simply means that it's possible to achieve a higher percentage delta on smaller indicators while the absolute difference can still be massive.
For instance, it’s possible for an entry level employee’s income to double in two years while a senior manager only gets a 10% raise each year. However, due to the difference in bases, it’s possible that the senior manager’s measly 10% raise is 3X the junior employee’s newly doubled salary.
Coming back to the banking saga, the base effect here is indeed adding shine to the performance of the public sector banks, rather than taking away from it.
Here is a quote from The Economic Times that reveals just how impressive this pace has been:
“The impressive loan growth of public sector banks becomes even more remarkable when considering their substantial existing loan base. As of the end of FY25, PSBs held a total loan portfolio of ₹98.2 lakh crore, representing 52.3% of the market share. In comparison, private sector banks (PVBs) had a loan base of ₹ 75.2 lakh crore, accounting for 40% of the total loans.”
If there was ever a time for the humble foot soldiers of Indian banking to gloat, this would be it.
Game. Set. Match.
To call this a phenomenal feat, we must establish the phenomenon. And the more one digs into this, the more revelatory things get – both from the brass tacks perspective but also from a big picture view of what happens next in the credit ecosystem. You’ve seen the headline numbers. Now, it’s time to talk about what happened behind the scenes.
First, the PSBs pulled off a stunning clean up job under the supervision of former RBI Governor Raghuram Rajan, who forced an Asset Quality Review in the entire banking system. For a few years, bitter pills were swallowed, and pain endured.
Sidenote: This was the same time when banking heads used to say, “the worst is over” in the media more often than they say, “thank you”.
During this period, however, the Gross NPAs in PSBs reduced from a high of ~15% in 2018 to just about 3% in December 2024.
Second, this turnaround was helped by a capital infusion of more than ₹3 lakh crore from the government.
This led to stronger balance sheets, increased ability to lend, improved margins, and a sprinkle of fairy dust.
The result? In FY25, public sector banks reported record-breaking profits! Yes, records were broken. PSBs recorded a 26% year-on-year increase in profits while private banks could clock a measly 7% - bogged down by trouble in certain banks.
What makes this impressive is that PSB profits have come from lending operations, treasury income as well as lower provisions for bad loans – ironically, at a time when private banks have had to increase provisioning due to additional slippages.
Public sector banks were also helped by an easier rate environment which increased liquidity aka availability of funds that helped fuel the credit offtake.
All in all, the situation is such that private sector banks are worrying about their competitiveness – publicly.
The great levelling
ICICI Bank says it’ll look to find “other levers” to maintain growth and profitability as the competition intensifies from public sector banks.
“There are very large, capable competitors who are also priced meaningfully below us," Anindya Banerjee, group CFO, ICICI Bank, said during the earnings call on April 19. "It does create some challenges in terms of growth, but I guess that's part of life. So, we will have to keep dealing with it as we go along and look at how we can drive other levers to continue to maintain profitable growth."
HDFC Bank, meanwhile, says that public sector banks are winning because of their growth-at-all-costs-mindset and offering credit cheaper than most others.
"We have seen over last 12 months, 18 months, the larger ticket corporate loans and the larger ticket SME loans, have been competitive, particularly coming from certain public sector institutions where the growth is an objective and not necessarily margin or returns, we have seen that pricing is very, very low on those," Srinivasan Vaidyanathan, CFO of HDFC Bank had said in April.
Indeed, the war on credit growth seems to be being fought over interest rates. Public sector banks' interest rates are far more competitive than private sector banks – across home, personal, or even business credit. This interest rate differential is captured in the chart below, which tracks average rates across lenders and across product categories.
One could look at this chart and wonder whether public sector banks haven’t always had more competitive pricing, and they would be correct. However, the distinction between the past and the present is that this time around, the difference in lending rates seems to be more pronounced, especially in certain categories.
And let’s be honest – the rate differential isn’t the entire issue. It’s only become an issue because the countering moats of private banks are fast being eroded – perhaps enough for consumers to stop wanting to pay the premium.
The Digital Awakening
Here’s how this happened.
One, PSBs invested heavily in building user interfaces like apps and websites to enable digital banking. Second, they upgraded back-end infrastructure to enable straight-through-processing and instant credit. Third, there seems to be a concerted effort in reducing middlemen and serving customers directly which helps protect margins and gives more room to offer cheaper rates.
Consider this – SBI’s digital banking app YONO has contributed more than ₹3.2 lakh crore in digital disbursals since its inception in November 2017. This is a small app of India’s largest bank. SBI has multiple other apps, apart from dozens of other channels to disburse digital credit. But this one direct-to-consumer play has a massive base of 8.7 crore users, and it brought in the bulk of its USD 9.2 billion profits, according to an analysis.
This is not a one-off.
Across public sector banks, digital is becoming a bigger priority. Most banks report a 40%-50% year-on-year increase in digital transactions while overall business sourcing through digital is moving into the top 2 deciles for almost all lenders. In fact, a perusal of their annual reports will show that most of the biggest strategic investments are going towards digital transformation – the trend is the same – from a Punjab National Bank that’s now doing pre-approved STP business loans to a Canara Bank which has a digital portal for MSME lending and an API hub.
These developments could meaningfully shapeshift the landscape and make life further difficult for private sector banks, FinTechs and NBFCs who will now be forced to keep up even harder just to defend their positions.
Here are some ways in which this could play out.
What happens next:
Digital lending has leveled the playing field, eroding the agility advantage traditionally enjoyed by private banks and NBFCs.
Increased digitization across banks has intensified competition, pressuring margins industry-wide but creating consumer-friendly lending standards.
The premium on credit will no longer come as easy to even the most modern lenders – pricing becomes a battlefront rather than a golden goose.
Despite this growth, vigilance is crucial—rising credit, especially unsecured personal and small-ticket loans, could pose new risks in NPAs.
The rate cycle is yet to play out fully, and there could be unforeseen threats lurking in the shadows from both a transmission and liquidity perspective.
Final countdown
If one looks at a broader picture, there are only two conclusions that matter. One is that no entity, however large, is safe from being disrupted. And the disruption can come from the unlikeliest of the places – barely anyone would expect SBI to emerge as India’s leading digital bank/lender.
Second, it’s no longer possible to charge premiums as easily as in the days of yore (about 3 years ago). Every entity will face margin pressures, competitive heat as well as regulatory hurdles if they chase growth at all costs.
Product innovation, business stability, and performance predictability are going to be the flavours of the season.
Until a crazy data point changes our entire worldview. Again.
PS: We asked Capitalmind why they stopped updating the “the worst is behind us” tracker. Their response:
“Because they [banks] stopped saying worst is over and accepted things are gonna get bad.”
This is all from me this week. I will see you next week.
Cheers,
Rajat