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PSBs borrow more to cater to credit demand

By Sohail Khan 27 August 2026, 12:36 am

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Business News›Industry›Banking/Finance›Banking›Shifting Gears: PSBs borrow more to cater to credit demand as deposits lag

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Shifting Gears: PSBs borrow more to cater to credit demand as deposits lag
Synopsis

Public sector banks are borrowing more to fund lending expansion. Deposits are not keeping pace with credit growth for these banks. Private banks show stronger deposit growth and are gaining market share. This trend raises concerns about funding sustainability for state-owned lenders. Abundant system liquidity currently cushions the impact of these shifts.

Mumbai: State-owned banks are increasingly turning to borrowings to finance lending expansion as deposits fail to keep pace with credit growth, potentially eroding their traditional funding and liquidity advantage over private lenders.

Borrowings by public-sector banks surged nearly 29% year-on-year in the June quarter, compared with growth of about 3% at private banks.

The divergence coincided with private banks widening their deposit-growth advantage over state-owned lenders to nearly four percentage points. Private banks grew deposits 14.3% year-on-year in the quarter, ahead of the 10.7% expansion recorded by PSU banks, helping them gain deposit market share.

ET Bureau

Shifting Gears Public banks may be losing liquidity edge as private peers’ deposits grow faster

"In the absence of any meaningful improvement in deposit mobilisation, PSBs continued to rely on strong growth in borrowings to support credit expansion," said Pranav Gundlapalle, head of India financials at Bernstein. "PSBs' continued reliance on borrowings could act as a drag on NIMs (net interest margins) relative to private banks."

For now, though, abundant system liquidity and softer wholesale funding rates are cushioning the impact.

Weighted-average certificate-of-deposit rates moderated to about 6.8% in July from 7.3% around the end of FY26, while issuances declined to ₹95,900 crore from about ₹1.8 lakh crore, Bernstein data showed.

PSU banks also continue to outperform private rivals on earnings. Their net interest income growth exceeded that of private banks by about four percentage points in the June quarter, aided by better margin performance and faster growth in higher-yielding retail loans.

The combination of faster credit growth and slower deposit growth at PSU banks is, however, raising concerns about funding sustainability.

"PSU banks grew advances slightly faster than private banks in Q1FY27, but on a much thinner deposit base, pushing aggregate LDR (loan-to-deposit ratio) up sharply to 81% from 77% year-on-year," said Suresh Ganapathy, head of financial services research at Macquarie Capital. "Private banks, by contrast, matched strong credit growth with healthier deposit accretion, leaving LDR only modestly higher at 92% from 91%. This makes private-bank growth appear better funded-albeit from an elevated deployment level-while PSU banks are increasingly using surplus liquidity to drive loan growth," he said.

Although PSU banks' loan-to-deposit ratio remains considerably below that of private lenders, its sharper increase indicates that their surplus balance-sheet liquidity is being deployed at a faster pace. Bernstein also noted that the gap between the two groups' liquidity coverage ratios was narrower than indicated by their headline LDRs, limiting PSU banks' capacity to sustain materially faster credit growth.

The deposit divergence reflects a decade-long structural shift. PSU banks' share of system deposits declined to 57% in March 2026 from 76% at the end of 2013-14. Private banks, meanwhile, increased their share to 36.4% from 19.4% over the same period, according to Reserve Bank of India data.

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