A new working paper by the Economic Advisory Council to the Prime Minister reports that public sector banks achieved 93.12% efficiency in FY26, surpassing private lenders at 86.02%. While operational gains are clear, investors should note that challenges like the widening gap between loan and deposit growth and pressure on profit margins remain important areas to monitor.
A recent working paper by the Economic Advisory Council to the Prime Minister (EAC-PM) has highlighted a shift in the operational performance of Indian banks. The study, which analyzed the performance of 47 banks from FY15 to FY26, found that public sector banks (PSBs) have become more efficient than their private and foreign counterparts. By FY26, public sector banks reached a technical efficiency score of 93.12%, compared to 86.02% for private sector banks.
The research indicates that this improvement was largely driven by large capital injections and the adoption of new technologies across government-owned banks. Additionally, the quality of loan portfolios has improved, with public sector banks seeing their gross bad loan ratio fall to 1.68% as of June 2026. This indicates that these banks have become better at managing their assets and reducing losses from unpaid loans compared to previous years.
However, while operational efficiency has risen, the banking sector is currently facing specific financial hurdles that investors should monitor. Data shows that credit growth is running at 19.3%, while deposit growth is lagging behind at 15.4%. This gap means that banks are lending money faster than they are collecting deposits, which can create a liquidity shortage. To keep lending, banks may need to rely on more expensive forms of borrowing, which can negatively affect their profit margins.
In contrast to private lenders, public sector banks have traditionally struggled with a higher cost of funds because they do not always have the same level of access to low-cost deposits from current and savings accounts (often called CASA). Because private banks are generally better at attracting these cheaper funds, they often have an advantage in protecting their profit margins, even if their operational efficiency scores differ in the study.
Furthermore, the competitive landscape in specialized areas remains a challenge for public sector lenders. While they have improved significantly in general banking, private banks continue to hold a stronger position in premium and high-value segments, such as credit cards and wealth management. These segments are often more profitable, and private lenders have historically shown more agility in capturing these customers.
Looking ahead, the sector is preparing for a new phase of banking driven by artificial intelligence. The EAC-PM report suggests that the future will involve more personalized services through AI-driven automation. For investors, the long-term benefit for any bank—public or private—will depend on how successfully they balance this technological expansion with the need to attract low-cost deposits and maintain healthy profit margins amidst a growing gap between credit and deposit growth.