Challenges Ahead: Public Sector Banks Brace for Margin Pressure Amidst Private Competition

A Dolat Capital report predicts continued margin pressures on public sector banks (PSBs) in FY27 as private banks more effectively transmit policy rate cuts. The PSBs are struggling with liquidity conditions, and while RBI measures may bring some relief, substantial challenges remain in credit growth and deposit mobilization.

Public sector banks (PSBs) in India are expected to experience ongoing margin pressure in the fiscal year 2027, according to a recent report by Dolat Capital. This situation arises as private banks have more effectively passed on policy rate cuts through greater reductions in lending rates, positioning them favorably compared to their public counterparts.

Private banks have successfully transmitted 108 basis points on fresh loans following a repo rate cut, while PSBs managed just 66 basis points. This disparity extends to deposit activities, where PSBs transmitted '53bps on outstanding and 74bps on fresh deposits,' compared to private banks’ '46bps on outstanding and 73bps on fresh deposits.'

The report also highlights the widening gap—exceeding 500 basis points—in the credit-deposit ratio, indicating tighter liquidity conditions. Concessional measures by the Reserve Bank of India (RBI) to subsidize hedging costs are anticipated to support inflows in foreign currency from non-resident banking sectors. However, challenges persist, as illustrated by the declining yields and gold loan corrections since March 2026, underscoring the need for close monitoring of credit growth trends.