RBI’s rate cuts fail to ignite lending surge: PSU banks’ measured approach for FY26

By: Shantanu Bhattacharji

State-controlled lenders aren’t resisting growth but exercising measured discipline amid fragile fundamentals. Their caution reflects risk awareness, not a lack of ambition.

The Reserve Bank of India (RBI) is doing the heavy lifting to reignite economic momentum. Policy rates are falling, liquidity is abundant, and transmission mechanisms are functioning. But India’s largest state-run lenders are holding their ground — and their purse strings. 

Heading into FY26, public sector banks are striking a markedly cautious tone. Credit growth projections remain pinned at 11–13 per cent, barely nudging past last year’s 11 per cent. Deposit growth, too, is expected to stay muted at 9–11 per cent, despite surplus liquidity. In theory, rate cuts should unleash a lending surge. In practice, restraint is the dominant mood. 

Analysts say this isn’t just conservatism for its own sake. It reflects a deeper structural unease across India’s credit landscape. 

Start with retail lending. Appetite for unsecured loans and mortgages is tapering. Banks are also reluctant to extend credit to non-banking financial companies (NBFCs), which once acted as essential links in the lending chain. On the corporate side, demand is tepid, as tariff-related uncertainties cast a shadow over investment decisions and dent risk appetite. 

Even the top brass is striking a measured tone. SBI Chairman CS Setty has scaled down the bank’s credit growth outlook, citing global trade friction and the lack of policy clarity. India may be insulated from direct tariff shocks, but the ripple effects — particularly on capex and corporate sentiment — are impossible to ignore.

At the same time, shrinking margins are adding to the caution. With 30–40 per cent of public sector loan books tied to external benchmarks, lending rates have already dropped. But deposit rates, especially for retail accounts, haven’t adjusted as swiftly. The result: a squeeze. In Q4FY25, net interest income for PSBs grew just 2.7 per cent year-on-year, while profits were buoyed by one-offs like treasury gains and fee income. 

As Canara Bank’s CEO noted, rate cuts have been passed through to nearly half the loan book, but deposit rates remain elevated due to intense competition for savings. That imbalance is unlikely to ease until deposit re-pricing catches up — a process bankers believe will only gain momentum in the second half of the year. 

Union Bank of India’s move to withhold formal guidance for FY26 is telling. It’s not indecision — it’s recognition that the macro picture is still too hazy to forecast with confidence. 

But the real takeaway isn’t just the restraint — it’s the readiness. These banks remember the hard lessons of the past decade: the twin balance sheet crisis, the collapse in asset quality, and the slow, painful path to recapitalisation. That legacy has instilled a hard-won discipline. 

So while the RBI continues to ease and global tailwinds potentially firm up, any upside in credit growth will be welcome — but not assumed. If growth disappoints, the blame won’t lie with policy transmission. It will point to more fundamental issues: subdued demand, fragile confidence, and pricing mismatches. 

In that context, state-run banks aren’t retreating. They’re recalibrating. And in a world where volatility is the norm, perhaps the boldest bet is one that hedges against euphoria. 

Experts say public sector lenders aren’t resisting growth — they’re responding to fragile fundamentals with measured discipline. Their caution signals not a failure of ambition but an acute awareness of evolving risks. Until demand strengthens and margins stabilize, restraint may not just be prudent — it may be the most responsible form of leadership.