Public sector banks (PSBs) in India have recorded a 13.1 per cent year-on-year loan growth in the financial year 2024–25 (FY25), surpassing the 9 per cent growth of private banks for the first time since 2011. Data from the , supported by analysis from Bernstein, shows the PSBs last held a four-percentage point lead over private banks in loan growth back in 2011, which then widened substantially, reaching a peak of around 20 per cent in 2016.
However, during the Covid-19 pandemic period, the difference narrowed again, returning to approximately four per cent by the end of the financial year 2024–25 (FY25). This reversal after more than a decade of private banks leading loan expansion signals a significant shift in the banking sector’s competitive dynamics. But beyond the headline numbers, what does this mean for the industry, borrowers, and investors?
For years, private banks have been the darlings of investors and borrowers alike, growing faster and commanding premium valuations owing to higher profitability and perceived efficiency. The recent surge in PSB loan growth challenges this narrative and suggests that public banks are regaining ground, particularly in key segments such as mortgages, corporate lending, and retail loans.
Pranav Gundlapalle, India head for financials at Bernstein, told the Economic Times that private banks have traditionally commanded premium valuations due to their steady market share gains, typically growing 6–7 per cent faster than the overall banking system.
ICICI Bank, India’s second-largest private lender, has acknowledged the intensifying competition from PSBs. After its latest quarterly results, CEO Sandeep Bakhshi noted that while ICICI Bank continues to deliver strong loan growth — 13.9 per cent year-on-year as of March 2025 — and robust profitability, the competitive environment is becoming more challenging due to aggressive pricing by PSBs, especially in large corporate and SME loans.
Bakhshi emphasised ICICI’s disciplined approach to growth, highlighting that around 76 per cent of its corporate loans are to top-rated companies, with only 0.3 per cent in riskier BB-and-below categories. This strategy aims to balance growth with asset quality, a key factor in sustaining profitability amid rising competition.
The resurgence of PSBs is likely to benefit borrowers through more competitive loan pricing and wider credit availability. PSBs’ extensive branch networks, especially in semi-urban and rural areas, combined with government-backed housing schemes, have enabled them to gain market share in home loans and affordable credit segments. This increased competition could lead to better terms for individuals and businesses seeking credit.
The narrowing gap in loan growth between PSBs and private banks may prompt investors to rethink their preferences. Private banks like ICICI Bank and HDFC Bank have traditionally traded at higher price-to-book ratios due to superior growth and profitability metrics.
However, with PSBs now growing faster on a larger base and improving operational metrics, the rationale for such valuation premiums could be questioned.
ICICI Bank’s recent financial performance shows healthy profit growth of around 15 per cent year-on-year, with net interest margins holding steady at 4.41 per cent, despite the competitive pressures. This indicates that private banks are maintaining profitability but may face margin pressures as PSBs continue to price aggressively.
PSBs’ loan growth revival supports broader economic goals such as financial inclusion and infrastructure development, as these banks often serve as conduits for government initiatives in underserved regions. Their ability to extend credit across sectors can stimulate economic activity and job creation.
However, sustaining this momentum requires PSBs to continue addressing challenges like asset quality and operational efficiency. Meanwhile, private banks must innovate and manage risks prudently to maintain their market positions.
