Mumbai: India’s private-sector banks outperformed their public-sector peers in the June quarter, with higher aggregate profits, faster deposit growth and overall better asset quality, a comparison of 18 private and 12 public-sector lenders showed.
In comparison, state-owned banks have seen steeper improvements in asset quality and faster growth in net interest income (NII), the difference between interest earned on loans and paid on deposits.
Private banks showed a stronger overall performance on profitability and the quality of growth. According to Bloomberg data, 18 private banks reported aggregate net profit of ₹55,019 crore in the first quarter of fiscal year 2027 (Q1FY27), compared with ₹50,173 crore for 12 public-sector banks. Private-bank profits grew 15.6% year-on-year, ahead of the 13.5% growth recorded by their counterparts.
Private lenders also expanded deposits faster, rising 14.0% year-on-year to ₹96.59 trillion, against 10.1% growth for PSUs to ₹157.25 trillion. However, credit growth was largely neck-and-neck, with advances at private banks rising 17% to ₹87.72 trillion and those at PSUs rising 17.4% to ₹129.65 trillion.
The biggest divergence came in asset quality. Aggregate gross non-performing assets (NPAs) of PSU banks declined 13.1% year-on-year to ₹2.41 trillion, a sharper improvement than the 8.9% decline for private banks to ₹1.29 trillion. Private banks still have a cleaner asset-quality profile, but the gap with PSUs has narrowed as state-run lenders continue to clean up their books.
“June quarter for the banking system has been a challenge on the deposit side, but banks had a good leeway on loan growth because of weak conditions in the capital market and the overseas swap rates. They had good traction on loan growth, and that also protected the net interest margins (NIMs),” said Sanjay Agarwal, senior director at CARE Ratings.
Diverging growth strategies
Overall, the banking system’s credit growth, excluding food credit, rose to ₹217 trillion at the end of June, up over 2% from 31 March, according to Reserve Bank of India data. Deposits grew by a little over 1% in the quarter to ₹265 trillion.
“PSUs had some leeway due to excess statutory liquidity ratio (SLR), and their credit-to-deposit (CD) rates are pretty optimal right now, and they were able to focus on loan growth, whereas private-sector banks were slightly negative. So, they were constrained in their asset growth, and they had to focus on deposit growth,” Agarwal said.
PSU banks have been gaining incremental market share in credit, accounting for 52.9% of the loan mix as of March 2026, according to a report by Motilal Oswal Financial Services on 7 August. State-owned banks have been gaining market share over their private peers for the second consecutive year in FY26. However, going forward, Motilal expects growth in private banks to recover, with the segment likely to outpace PSUs, given that several of them have optimized their balance sheets with elevated CD ratios and declining loan-to-coverage (LCRs).
The brokerage has priced in 16% on-year growth for private banks and 13.5% for their PSU counterparts in its FY27 coverage.
PSU banks edge ahead
The trend of NIMs shrinking continues, but deterioration has been moderate this quarter and is likely to remain favourable for the banking system over the next two quarters, Agarwal said.
Among the largest lenders, ICICI Bank had the strongest margin profile, with its June quarter NIM expanding to 4.36% from 4.32% a quarter ago, followed by SBI’s NIM at 2.86%, improved by 5 basis points from a quarter ago. HDFC Bank’s NIM declined to 3.26% from 3.4% from a quarter and a year earlier.
“We expect near-term margins to remain muted, with a modest recovery from 2HFY27, supported by an improved asset mix and a reduction in wholesale funding costs on the back of healthy FCNR (B) flows,” Motilal Oswal Financial Services said in the report.
PSUs retained an advantage in NII. Their aggregate NII rose 13% to ₹1.20 trillion, compared with ₹1.12 trillion for private banks, with the former also recording faster NII growth. The larger NII reflects the considerably bigger balance sheets of state-run lenders.
Among large banks, HDFC, ICICI, Axis, and State Bank of India are all at or below 1.5% gross NPA ratio, while Bank of Baroda remains closer to 2% for the quarter.
“On the NPA side, PSU banks are heavy on the corporate segment, and the corporate sector has been doing phenomenally well for the last four-five years post-covid, that cycle is playing pretty well. So, that is also partly reflecting the same,” Prakash Agarwal, partner at Gefion Capital, said.
The provision coverage for private-sector banks like HDFC Bank has declined sharply, which has also added to private-sector profits, Agarwal said. For the quarter ended June, India’s largest private lender’s provision as a percentage of advances was at 2.36%, lower than 2.42% a quarter ago and 2.71% a year ago.
- Private banks posted a ₹55,019 crore profit, up 15.6%, outpacing PSU banks' growth.
- PSU banks cut gross NPAs 13.1%, outpacing private banks' 8.9% improvement this quarter.
- Private lenders grew deposits faster at 14%, while PSU credit share kept rising.
- ICICI Bank led margins at 4.36%; HDFC Bank's margin slipped to 3.26%.
- Motilal Oswal expects private banks to outgrow PSUs again through FY27, reversing trend.