Private Banks Thrive with Rising NIM as Public Sector Deposits Plummet – What’s Driving Change?

New Delhi: The latest data from the Reserve Bank of India (RBI) reveals a significant shift in deposit trends between private and public sector banks from FY19 to FY25. Private sector banks have seen a notable increase in their market share of savings and fixed deposits, while public sector banks have experienced a decline. This trend is attributed to the recent rate-hiking cycle initiated by the RBI. As deposits continue to shift towards private banks, the dynamics of the Indian banking sector are evolving, raising questions about profitability and future strategies.

Private Banks Beckon Savers Amid Rate Hikes

Recent statistics indicate a dramatic transformation in the Indian banking landscape, particularly in the realm of savings accounts. Data from the Reserve Bank of India (RBI) highlights that the share of private sector banks in savings account deposits surged by an impressive 526 basis points, reaching 30.6% from FY19 to FY25. On the other hand, public sector banks observed a sharp decline, with their share dropping by 575 basis points to 61.8% over the same period. This shift is a clear reflection of depositors preferring private banks, especially in light of the growing interest rates.

This trend became more pronounced after the RBI launched its rate-hiking cycle in May 2022, designed to combat surging inflation. As a result, private lenders have shown resilience during this tumultuous period, weathering the interest-rate storm better than their public counterparts.

Absolute Growth in Deposits

In a nutshell, private banks have more than doubled their savings deposits, climbing to ₹21 lakh crore by FY25, compared to a 54.6% increase for public sector banks, which reached ₹43 lakh crore.

Meanwhile, private banks have also gained ground in fixed deposits, with their share increasing to 35.3% in FY25 from 28.5% in FY19. Conversely, public sector banks experienced a drop in their share from 64% to 56.6%. This movement indicates growing consumer confidence in private banking options.

Bank Type	FY19 Share (%)	FY25 Share (%)	Growth (%)
Private Sector Banks – Savings Deposits	25.0	30.6	526 bps
Public Sector Banks – Savings Deposits	67.5	61.8	-575 bps
Private Sector Banks – Fixed Deposits	28.5	35.3	86 bps
Public Sector Banks – Fixed Deposits	64.0	56.6	-437 bps

Current Account Trends and Competition

Further analysis of current account balances shows that public sector banks have struggled to maintain their share, which plummeted to 38.1% in FY25 from 43.9% in FY19. Meanwhile, private banks have successfully increased their share to 44.7%, up from 40.8%.

This competitive landscape suggests that private banks have adopted aggressive strategies to win customers, but it isn’t without consequences. The push to attract more depositors has unintentionally compressed profit margins for these private lenders. Their average net interest margin (NIM) dipped to 5.2% in FY25 from 5.4% in FY19.

Meanwhile, public sector banks have benefited from this situation, as they reported an increase in average margins, moving from 2.51% to 3.12% during the same period, showcasing their relative stability compared to more volatile private lenders.

RBI’s Role and Forward Outlook

The RBI’s actions, particularly its repo rate hikes totaling 250 basis points between May 2022 and February 2023, were intended to manage inflation effectively. With a steady repo rate of 6.50% maintained until January this year, many banks faced pressure increasing both deposit and lending rates to remain competitive. The scenario raises questions about the future profitability of private banks, particularly if they continue this aggressive deposit acquisition strategy.

The shifting dynamics of the banking sector indicate a vital transformative phase for the Indian economy. Depositors are not merely voting with their wallets; they are indicating their trust in banks that offer better rates, services, and overall customer experience.

As the economic landscape evolves, it will be essential for both private and public sector banks to strategize effectively in response to market demands, while regulators like the RBI will need to monitor these changes diligently to maintain stability in the Indian economy.

Bankerpedia’s Insight 💡

The significant shift of depositors towards private banks highlights a pivotal transformation in India’s banking landscape. As their share in savings and fixed deposits increases, private banks face squeezed profit margins, while public sector banks are adapting by improving their net interest margins. This evolving dynamic influences competitive strategies and customer choices in an uncertain economic climate. For consumers, it may be wise to consider the balance between interest rates and service quality in choosing where to bank, especially as rate trends change. An informed approach can help maximize savings potential.

What Does This Mean for Me? 🤔

• Salaried Person → Private banks may offer better savings returns now.
• Business Owner → Private banks gaining market share impacts loan rates for owners.
• Student → Higher interest rates may benefit student savings accounts.
• Self-employed → Shift in savings strategy towards private banks needed.
• Homemaker → Increased savings options with private banks for homemakers.
• Retiree / Senior Citizen → Private banks offer better savings rates for retirees.
• Job Seeker → Increased competition may lead to better job opportunities.
• Farmer / Rural Citizen → Higher interest may boost savings options for farmers.

Research References 📚

• economictimes.indiatimes.com
• RBI
• SEBI
• Ministry of Finance
• NABARD
• Department of Financial Services (DFS)
• IMF
• World Bank

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