At a time when India’s
banking system is witnessing a steady recovery in credit growth, concerns around the loan-to-deposit ratio (LDR) have resurfaced. The debate has centred on whether rising
credit growth relative to deposits could become a structural headwind, particularly for public sector banks.
Speaking to ET Now, Yuvraj Choudhary from Anand Rathi Institutional offered a data-backed perspective, arguing that the issue may be less severe for PSU banks than widely perceived.
Responding to concerns that the industry’s loan-to-deposit ratio has been climbing in recent quarters, Choudhary said, “So basically, loan to deposit. So, if we look at the broad data, so the loan to deposit has been going up in the last few quarters because credit growth has been faster than the deposit growth. However, for PSU banks, if you look at the overall data, for PSU banks the credit to deposit ratio is almost 10% lower than the private banks. So, there has been lot of talks around PSU bank struggling in the LDR ratio. However, if we look at the recent trends, say for example for SBI, the credit to deposit ratio for SBI is close to 73-74%, which is much lower than what the industry is at. So, although credit to deposit ratio has been going up, but it is less of a problem for PSU banks compared to private banks.”
The example of State Bank of India (SBI) underscores the point. With a credit-to-deposit ratio in the low-70% range, SBI appears to have significant headroom compared with several private peers operating at tighter levels.
Deposit Growth Catching Up
While PSU banks have faced questions around deposit mobilisation, Choudhary noted that the gap between credit and deposit growth is beginning to narrow.
“See, if you look at the overall deposit for the PSU banks, obviously it was lower than the credit growth; however, in the last few quarters deposit growth has started to pick up. So, obviously going forward, deposits it is a very key matrix, so deposit growth would be very important for PSU banks to sustain their credit growth; however, again I would like to reiterate, it is lesser of a problem for PSU banks compared to private banks.”
On system-wide credit expansion, he added that PSU banks have actually been leading the charge in recent quarters. “See, if you look at the recent credit growth, so PSU banks have been outperforming private banks now for multiple quarters on the credit growth side. So, if you look at the balance sheet structure the CD ratio has been increasing for PSU banks because essentially now they are lending, so the lending has increased. So, we expect this trend to continue because firstly, PSU banks has better deposit franchise compared to private banks and secondly, if you look at the investment book, they have higher liquidity which means higher SLR compared to private banks.”
In other words, rising CD ratios for PSU banks reflect a revival in lending activity rather than a liquidity squeeze.
Microfinance: Signs of a Turnaround
Beyond mainstream banking, Choudhary also addressed the microfinance segment, which has undergone a prolonged stress cycle over the past year to 18 months. With valuations correcting sharply, investors are watching closely for signs of stabilisation.
“See, if we look at microfinance, it has gone through a difficult cycle in last one, one-and-a-half years. So, if you look at the recent trends, say specifically the collections and disbursements, so in last couple of quarters so there has been a significant improvement in collections. So, it is close to the normalised levels and if you look at the disbursements, it has started to pick up across the sector. So, fundamentally if you look at the MFI sector, it is starting to normalise. So, if this continues, the rerating might come.”
Improving collections and a pickup in fresh disbursements suggest that the worst of the asset-quality stress may be behind the sector, opening the door for potential rerating over the coming quarters.
PSUs Outperforming on Key Metrics
When asked about broader banking preferences, Choudhary highlighted three parameters — asset quality, loan growth and return on equity — where PSU banks are currently ahead.
“So, if you look at the last few quarters, even if you look at this quarter, so if you look at broadly three parameters, asset quality, loan growth, and ROEs, so PSU banks have clearly outperformed private banks on three parameters. If you look at asset quality, their gross slippages on an aggregate basis is 60 basis points for PSU banks, it is 100 basis point lower than private banks. So, that is a very healthy asset quality for them. So, it has been now for few quarters now that they have been outperforming private banks on asset quality. Secondly, even if you look at the loan growth number, the outperformance is there and lastly, on the ROE side, so on an aggregate basis PSU banks are generating an ROE closer to 15%, so that is 200 to 300 basis points higher than private banks. So clearly, the performance is there. So, we expect PSU banks to outperform private banks at least in the near term.”
Are Earnings Too Dependent on Non-Core Income?
A lingering concern among some analysts is whether PSU bank profitability is being flattered by non-core income — including treasury gains and recoveries — rather than sustainable core operations.
Addressing this, Choudhary said, “So, that is a very good question. So, if you look at, so obviously treasury and recoveries are part of the normal operations for any of the bank. So, let us take an example of SBI. So, for SBI even if we remove the whole income from recovery part, income from treasury parts, so they are generating an ROA which is closer to 80 basis point on a normalised level and it has been for last multiple quarters. And if you talk about say again taking an example for SBI, so in the last 10 years on an average they have…, so their income from recovery pool is closer to 10 basis point and if you look at the treasury for last 25 years for SBI on a normalised basis, so they have generated an income of 10 to 15 basis point from their treasury pool. So, the point here is that it is a part of their operations. So, 80 to 90 basis point they are generating without treasury and recovery and if we add that, so the ROA numbers come close to 1 to 1.1%.”
His argument suggests that while treasury gains and recoveries do support earnings, the underlying return metrics remain reasonably healthy even after stripping out these components.
Near-Term Bias Favors PSUs
Taken together, the data points to a shift in momentum within the banking pack. PSU banks, once seen as laggards, are currently delivering stronger credit growth, cleaner asset quality trends and superior return ratios.
If deposit growth continues to improve and the microfinance cycle stabilises as expected, the near-term performance gap between public and private sector lenders could persist — reshaping investor preferences in India’s banking landscape.
