PSBs poised for strong retail and MSME loan growth: Corporate lending moves to capital markets, says report

Public sector banks (PSBs) in India are set to see robust loan growth in retail, agriculture, and MSME segments in the coming quarter, according to a sector repirt by Nuvama Institutional Equities.While corporate lending has increasingly shifted to mutual funds and capital markets, loans to individuals, farmers, and small businesses are expected to drive overall growth."Most PSU banks are likely to report strong loan growth driven by RAM (retail, agri and MSME). While corporate loan growth has been disintermediated by mutual funds and capital markets, select AAA pockets reported corporate growth," the report said.

Bank-wise loan growth forecast

Margins to face moderate pressure

Despite strong loan growth, PSBs are expected to encounter moderate margin pressure.Punjab National Bank (PNB) anticipates flat net interest margins (NIM) sequentially, while Bank of Baroda (BoB) expects stable reported NIM, though its core NIM may dip by seven basis points.Indian Bank could see a decline of under 10 basis points, and Union Bank may experience a six-basis-point contraction. Canara Bank may face higher-than-sector pressure due to lower CASA ratios, whereas the State Bank of India (SBI) expects a five-basis-point drop in margins.

Asset quality likely to remain stable

The Nuvama report highlighted that asset quality across public sector banks (PSBs) is expected to remain healthy, with no major slippages anticipated.SBI, Bank of Baroda (BoB), and Indian Bank are projected to see improved slippage ratios, while other state-owned banks are expected to hold steady."Asset quality for state banks is likely to remain healthy with no lumpy slippage. Slippage would decrease for SBI, BoB and Indian Bank and remain flattish for others," the report noted, as quoted by ANI.

Return on assets and revenue outlook

The report also highlighted that return on assets (RoA) sustainability at over 1 per cent remains an investor concern, but key banks are positioned to maintain this benchmark. SBI and BoB are expected to sustain RoA above 1 per cent, supported by stronger core income, while PNB could see RoA expansion due to lower tax outgo.The Nuvama report, as cited by ANI, also noted that the PSU Bank Index has outperformed the private bank index by nearly 15% over the past six months, driven by robust loan growth and stable asset quality.On the revenue front, net interest income (NII) growth has been under pressure for both state-owned and private banks. For PSBs, NII growth was flat to negative year-on-year in Q1 FY26, while most private banks, except HDFC Bank and ICICI Bank, managed only low single-digit growth