Public Sector Banks (PSBs) have outperformed their private counterparts in credit growth during the first quarter of FY26, posting an 11% rise in net advances compared to 8.1% growth by Private Sector Banks (PVBs), according to a report released by CareEdge.
Despite this lead, the report highlights that only three out of seven PSBs included in the study recorded growth in net advances—driven primarily by increased lending in the retail, agriculture, and MSME sectors. The remaining PSBs saw a decline as they prioritized profitability over aggressive loan expansion.
The report also noted a broader slowdown in Net Interest Income (NII) across Scheduled Commercial Banks (SCBs), with year-on-year growth falling to 4.1% in Q1FY26, down from 12.7% in the same quarter last fiscal year.
While interest income for SCBs rose 6.0% overall (PSBs at 6.8%, PVBs at 5.7%), their interest expenses surged by 7.4%, primarily due to a 10% rise for PSBs and 6.4% for PVBs, driven by strong growth in term deposits.
Sequentially, NII declined 1.7% from the previous quarter, with PSBs registering a steeper fall of 4.8% due to falling yields on loans and sticky deposit costs, compressing profit margins. PVBs recorded a smaller decline of 0.6%.
The CASA (Current Account Savings Account) ratio also slipped to 37.3% from 38.5% a year ago. This was largely attributed to a shift toward higher-yielding term deposits and investments in alternative instruments, weakening banks’ access to low-cost funding. CASA deposits declined by 3% year-on-year, despite stable liquidity in the system.
Looking ahead to Q2FY26, CareEdge expects growth in rural markets, agriculture, and select MSME segments to continue, despite ongoing pricing pressures. The festive season is likely to boost urban retail demand, and the impact of the June 2025 50 bps repo rate cut is expected to reflect more clearly during the quarter.
The report concludes that while PSBs lead the way in credit growth, both public and private banks face margin pressures due to evolving funding dynamics and persistent challenges in attracting low-cost deposits.
