Public sector banks (PSBs) may see their outperformance over private sector peers diminish as key drivers like excess liquidity and low credit costs are nearing exhaustion. Analysts suggest that declining liquidity coverage ratios and the upcoming expected credit loss framework will constrain PSB growth and potentially lead to private banks growing faster.
The potential shift in competitive dynamics between public and private sector banks could impact credit availability, lending rates, and overall financial sector stability in India. It signals a maturing market where growth is increasingly driven by deposit mobilization rather than existing liquidity buffers.
Public sector banks (PSBs) in India may be losing their competitive edge over private sector peers as the liquidity and credit cost advantages they previously enjoyed are diminishing, according to analysts. PSBs have significantly reduced their holdings of high-quality liquid assets (HQLA) to support loan growth, leading to a sharp decline in their liquidity coverage ratios (LCR).
Analysts from Bernstein noted that PSBs' LCR has fallen to 123% as of March 2026 from 137% a year prior, indicating a substantial drawdown of reserves. This reduced liquidity is expected to constrain future loan growth, making it increasingly dependent on deposit accretion.
Furthermore, the upcoming implementation of the expected credit loss (ECL) framework from the first quarter of the next fiscal year will likely increase credit costs for PSBs. This framework requires banks to set aside provisions based on the probability of loan defaults.
Analysts anticipate that private sector lenders, such as HDFC Bank, which were previously hampered by merger-related issues, will re-enter the market more aggressively. This increased competition is expected to lead to a convergence in credit growth between PSBs and private banks, with private sector lenders potentially growing faster and regaining market share from next fiscal year onwards.
However, both PSBs and private banks are expected to benefit from a special FCNR (B) deposit scheme introduced by the Reserve Bank of India (RBI). This scheme absorbs the entire hedging cost for these deposits, which could lead to a significant increase in domestic liquidity.
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