PSU Banks Gain Market Share Amid Slowdown in Credit Growth: UBI Report

Public Sector Banks Outpace Peers Despite Tepid Credit Demand

In the midst of a broader deceleration in credit growth across the Indian banking landscape, public sector banks (PSBs) have emerged as unexpected beneficiaries by capturing a greater share of the market, according to a recent report published by Union Bank of India (UBI). The report highlights a notable divergence in lending trends, with PSBs demonstrating resilience and strategic adaptability, even as private banks and non-banking financial companies (NBFCs) grapple with slowing loan disbursals.

Slowing Credit Growth Across the Industry

India’s overall bank credit growth has shown signs of moderation in recent quarters. Data from the Reserve Bank of India (RBI) reveals that credit growth eased to 13.9% year-on-year in May 2025, down from 15.5% a year earlier. Rising interest rates, cautious consumer sentiment, and delayed capital expenditure plans among corporates have contributed to this softening trend.

However, the UBI report notes that this slowdown has not been uniform across segments. While retail credit, especially unsecured personal loans, continues to witness traction, corporate and MSME lending has experienced a more noticeable deceleration.

PSBs Take the Lead in Credit Market Share

Despite the macro headwinds, PSBs have managed to increase their share in overall bank credit. According to the UBI report, public sector banks accounted for 63.2% of total bank credit in FY25, up from 61.8% in FY24, reversing the years-long trend of private banks eroding their dominance.

The report attributes this gain to several factors, including improved operational efficiency, aggressive credit outreach under government-backed schemes, and enhanced risk assessment frameworks implemented post the Asset Quality Review era.

“PSBs have not only strengthened their balance sheets over the last few years but have also significantly improved their credit underwriting practices. The digital push and government initiatives like ECLGS have also helped deepen their customer base,” said Rajeev Arora, Chief Economist at UBI.

Government Initiatives and Lending Schemes Fuel Growth

The report specifically notes that schemes such as the Emergency Credit Line Guarantee Scheme (ECLGS) and PM Vishwakarma Yojana have enabled PSBs to extend credit more confidently to MSMEs and self-employed borrowers. Moreover, financial inclusion efforts via the Jan Dhan-Aadhaar-Mobile (JAM) trinity have improved credit penetration in rural and semi-urban areas, where PSBs maintain a strong physical presence.

This advantage, coupled with a wide network of branches and trust among older demographics, continues to give state-run banks an edge in regions where private lenders are underpenetrated.

Private Banks and NBFCs Face Margin Pressure

In contrast, many private sector banks and NBFCs have adopted a more cautious lending stance amid growing concerns over asset quality and potential stress in retail unsecured portfolios. Recent regulatory tightening by the RBI, including enhanced risk weight requirements on personal loans and credit cards, has also led to a recalibration in credit strategies.

“While private banks remain fundamentally strong, the near-term outlook appears constrained by rising cost of funds and regulatory interventions,” commented Priya Mehta, banking sector analyst at Kotak Institutional Equities.

Investor Sentiment Turns Positive on PSU Banks

The improving fundamentals of PSBs have also been reflected in market performance. The Nifty PSU Bank index has outperformed its private bank counterpart so far in 2025, delivering over 20% returns year-to-date, driven by strong earnings growth, record low NPAs, and steady return on assets (RoA).

Union Bank of India, Bank of Baroda, and Canara Bank have all reported double-digit credit growth and improved net interest margins (NIMs) in Q4 FY25, reinforcing investor confidence.

“Valuations of PSBs still remain attractive compared to private banks. With cleaner books and consistent profitability, they are now being re-rated by the market,” noted Vishal Shah, portfolio manager at HDFC AMC.

Outlook: Sustainability Will Be Key

While the current uptick in PSB market share is encouraging, analysts caution that sustaining this momentum will require continuous innovation, deeper digitization, and prudent risk management. With credit growth projected to remain moderate in FY26, banks across the board will need to focus on selective lending and improving operational efficiency.

The UBI report concludes that “PSBs are well-positioned to retain their gains if they continue aligning with evolving credit demand patterns, leverage digital transformation, and maintain robust asset quality.”

In an increasingly competitive and regulated environment, this resurgence of public sector banks could mark a significant shift in the Indian banking narrative—one where scale, reach, and systemic trust translate into tangible performance.