When public banks beat private banks-Why it may not last

If you’ve been wondering whether India’s public sector banks – those owned and controlled by the government – are finally catching up with their private counterparts, the latest quarterly results suggest something interesting is happening. For the first time in years, public banks have actually grown faster than private banks on some important measures. But before you assume this is a permanent shift, there’s a more complicated story beneath the surface that every investor and account-holder should understand.

What happened this quarter?

In the April-June period of 2026, something unusual occurred. Public sector banks (PSBs) – institutions like State Bank of India, Bank of Baroda, and Punjab National Bank – grew their operating profits 15.7 per cent faster than smaller PSBs and 10.3 per cent for larger ones. Meanwhile, private banks like ICICI Bank and Axis Bank grew at slower rates: 9.4 per cent for smaller private banks and just 4.2 per cent for the largest ones.

In simple terms: the government banks outran the private banks. But how did this happen, and more importantly, will it last?

Three reasons public banks won this quarter

The investment portfolio advantage

Imagine you have two businessmen. One has money tied up in multiple businesses (loans). The other has money sitting in safer investments like government bonds. When interest rates go down, the first businessman suffers because his loan customers now pay less interest. The second businessman benefits because when his old bonds mature, he can reinvest the money at rates that are surprisingly still decent.

Public sector banks are like that second businessman. They hold huge portfolios of government bonds and securities. Private banks, by contrast, have most of their money lent out as loans to customers and businesses. So when the India’s central bank RBI cut interest rates earlier, public banks’ profit margins actually improved because of their investment income. Private banks, lacking this cushion, felt the pinch more directly.

In technical terms: PSBs saw their net interest margins improve by 5 basis points (a very small unit of measurement, but it adds up), while private banks’ margins actually fell by 9 basis points.

Fee income – A surprising win

Public banks grew their fee income – the money they earn from services like money transfers, forex trading, and loan processing – by 30.1 per cent. Private banks managed only 13.5 per cent. That’s more than twice as fast.

Why? Public sector banks have been investing heavily in infrastructure and services that generate these fees. They’ve expanded their transaction banking operations, forex services, and trade finance. Some of this income also comes from what’s called “priority sector lending certificates” – essentially selling the right to lend to certain government-favoured sectors – which has become a regular income stream for PSBs.

Cost control

Public banks kept a lid on their costs this quarter. Their operating expenses grew by only 1.6 per cent year-on-year, while their income grew 7.6 per cent. That’s good housekeeping – you’re making more money without spending significantly more.

This narrowed the gap between public and private banks. Previously, it was common to see private banks running much leaner operations. Now, the cost-efficiency gap has shrunk to just three percentage points – the smallest it’s been in recent years.

The uncomfortable truth: Not everything is what it seems

Here’s where the story gets less rosy. If you look at the actual profits (the money banks keep after paying out claims and taxes), they grew about three times faster than their operating profits. That’s unusual. And it points to a problem.

When profit grows much faster than operating profit, it usually means banks are paying out less money in provisions – essentially, money set aside for loans that might go bad. Public sector banks cut their provisions by 19 per cent, compared to only 5 per cent for private banks. That sounds good initially. But it also raises a red flag.

The provision question

Think of provisions like an emergency fund. If a bank lends Rs 100 and suspects that Rs 10 of those loans might not be repaid, it sets aside Rs 10 as a provision. This reduces reported profit, but it’s the honest thing to do.

If a bank suddenly reduces that provision, its reported profit goes up. But the underlying loan quality may not have genuinely improved – the bank is just accounting for it differently.

Public sector banks claim their asset quality has genuinely improved. They point to:

l Slippages at multi-quarter lows: Fewer loans are turning bad

l Credit costs halved: The actual money being lost to bad loans has fallen dramatically

l Provision coverage above 90 per cent: They have enough money set aside to cover bad loans

But there are warning signs:

l Early-warning indicators: At two public banks, the number of loans showing stress (called SMA-2 accounts) actually rose

l Continuing MSME stress: Micro, small, and medium enterprises (MSMEs) – the backbone of India’s economy – are still struggling

l Conservative guidance: Several banks are running below their own credit-cost expectations yet refuse to lower those expectations, citing uncertainty ahead

In plain English: banks are saying things are getting better, but they’re not lowering their guards. That suggests they’re not entirely confident either.

Will this outperformance last?

Probably not. Here’s why:

Provisions can only fall so far

Once a bank’s provisions reach their minimum level — determined by accounting rules and regulations — they can’t fall any further. When that happens, profit growth will depend entirely on operating profit growth. And the banks that leaned hardest on lower provisions this quarter don’t have as strong an operating foundation to fall back on.

Timing advantages fade

Public banks that cut high-cost deposits (like bulk deposits) early in the year captured funding-cost savings faster. But larger private banks expect to catch up on this from the next quarter onward. Once they do, the advantage disappears.

Costs will rise

The cost savings this quarter are a temporary pause, not a permanent trend. Banks have announced major hiring plans — one public bank is adding 1,000 credit officers — and heavy investments in technology and artificial intelligence. These costs will accelerate through the year.

Treasury income was a one-time boost

Securities that mature get reinvested. That provided a boost this quarter. But treasury income has been exceptional only in specific quarters. Going forward, it’s expected to remain modest as global yields remain volatile.

The bigger picture: A narrowing gap, not a reversal

What’s genuinely interesting is not that public banks “won” this quarter. It’s that the competitive gap between public and private banks is genuinely narrowing.

After nearly a decade where everyone assumed private banks were India’s only banking engine, this is a useful reality check. Public sector banks are:

l Profitable: They’re making good money

l Better capitalized: They have enough reserves to weather crises

l Competing seriously: They’re not just surviving; they’re competing on service and innovation

But the durable test isn’t one quarter. It’s the next four or five quarters.

What you should watch for

If you own shares in banks or have deposits in them, here are three things to track:

1. How long can provisions stay low? Once they start rising again – as they inevitably will – will operating profit still grow fast enough to keep overall profit growth respectable?

2. When private banks catch up on deposit costs, will public banks still have a margin advantage?

3. As costs reaccelerate, will the efficiency gains hold up?

The bottom line

Public sector banks have had a genuinely good quarter. Their improved fee income, margin stability, and cost discipline are real. But much of their profit growth came from releasing provisions – essentially, using accounting flexibility rather than better business performance. Once that lever stops working, we’ll see which banks truly have stronger operating foundations.

The banks most at risk are those still working through difficult loan portfolios, particularly in microfinance and unsecured lending. And those are disproportionately public banks.

So yes, public banks beat private banks this quarter. But the victory was partly borrowed from the future. The real test comes in the quarters ahead – when provisions have to stabilise, costs accelerate, and the gap between reported profit and actual operating profit must narrow.

Until that test is passed, celebrate cautiously.

(The writer is with the Cholleti BlackRobe Chambers, Hyderabad, and writes on economy, politics and law.)