The Great Divergence: Why PSU Banks are Out-Marginning Private Lenders in Q2

However, Q2 data reveals that Public Sector Undertaking (PSU) banks outpaced private peers in Net Interest Income (NII) growth—averaging ~18.4% compared to ~14.4% for private lenders—and recorded sequential NIM expansion (+10 bps on average), while private margins remained stagnant or compressed.

The FCNR(B) Funding Trap

The primary catalyst behind this divergence lies in the liability mechanics. Facing an intense domestic liquidity squeeze, large private lenders aggressively utilized the Reserve Bank of India’s concessional forex swap window to mobilize Foreign Currency Non-Resident (FCNR-B) deposits.

While this sustained headline credit expansion, FCNR-B liabilities carry costs akin to wholesale term deposits, diluting retail Current and Savings Account (CASA) ratios and triggering double-digit interest expense growth.