PSU Banks Face A Funding Squeeze As Private Lenders Win The Deposit Race

State-owned banks are increasingly relying on borrowings to fund loan growth as deposits fail to keep pace with credit expansion, potentially weakening one of their traditional advantages over private-sector lenders, the Economic Times reported.

Borrowings at public-sector banks (PSBs) jumped nearly 29% year-on-year in the June quarter, sharply outpacing the roughly 3% growth recorded by private banks. The trend comes as private lenders continue to attract deposits at a faster rate.

Private banks' deposits grew 14.3% year-on-year during the quarter, compared with 10.7% growth at PSBs.

This widened the deposit-growth gap to nearly four percentage points and allowed private lenders to further increase their share of the deposit market.

For now, however, PSBs are benefiting from comfortable liquidity conditions across the banking system and relatively cheaper wholesale funding.

Weighted-average certificate-of-deposit rates fell to around 6.8% in July from 7.3% at the end of FY26, while CD issuances dropped sharply to ₹95,900 crore from around ₹1.8 lakh crore, according to Bernstein data.

Credit Growth Raises Funding Concerns

The funding shift comes even as PSBs continue to outperform private banks on several earnings metrics.

Their net interest income grew around four percentage points faster than that of private lenders in the June quarter, supported by stronger margins and quicker expansion in higher-yielding retail loans.

However, the widening gap between credit and deposit growth is raising questions about how sustainable the pace of lending will be without greater reliance on market borrowings.

PSBs still have a substantially lower loan-to-deposit ratio than private banks, giving them a larger liquidity cushion.

But the sharper increase in their LDR indicates that this surplus balance-sheet liquidity is being deployed more rapidly.

Bernstein has also pointed out that the difference in liquidity coverage ratios between PSBs and private banks is smaller than their headline LDR gap suggests. This could constrain state-owned lenders' ability to maintain significantly faster credit growth over an extended period.

Private Banks Gain Deposit Share

The latest divergence reflects a longer-term shift in India's banking sector. According to Reserve Bank of India data, PSBs accounted for 57% of total system deposits in March 2026, down sharply from 76% at the end of FY2013-14.

Over the same period, private banks increased their share of system deposits to 36.4% from 19.4%.

The shift underscores the growing challenge for state-owned banks: while stronger loan growth is supporting earnings, their weakening deposit franchise could increasingly require them to depend on wholesale funding to sustain expansion.