New Delhi: Public Sector Banks in India are expected to lead credit growth in the medium term, with a loan growth that could be higher than the industry, a report by HSBC Global Investment Research said. The trend is expected to grow from 2025, when state-owned banks recorded advances growth of 5-12 percent, as against the private sector bank’s advances of 3-11 percent, according to a Moneycontrol analysis. PSU banks were able to sustain growth despite challenging demand conditions and slower credit demand.
This development comes on the backdrop of structural improvements in PSUs, which have cleaned up their books and non-performing assets over the years. Gross NPL ratios have declined to multi-year lows, as the banks have stepped up recoveries, write-offs and enhanced credit underwriting. Along with this, the banks have ensured lower slippages, boosting their profitability and risk appetites.
According to the report, PSU bank’s Net Interest Margins (NIMs) are expected to be stronger than historical averages, and moderate from their peak levels.
“Cost-to-income ratios should trend lower as revenue growth outpaces operating expense growth, aided by digitisation and branch productivity gains,” the report said, adding that this is expected to translate into improved return ratios.
In 2025, private banks remained selective in loan origination, offering PSU banks an opportunity to lend to corporates. Indian Overseas Bank has reported the strongest credit growth in 2025 at 11.3%, followed by Canara Bank at 7.7% and Bank of India at 7.1%. On the other hand, most large private banks saw modest growth of just about 4-5%.
There was a lower demand for credit in 2025, coupled with higher funding costs. For 2026, the trend of PSU banks leading lending growth is expected to continue, unless there is a disruption in demand from local or global markets.
