India's state-owned banks are demonstrating a strong appetite for corporate lending, evident in their significant sanctioned loan pipelines. Banks like SBI, PNB, and Bank of Baroda have showcased readiness to fund upcoming projects. However, the actual disbursement of these funds is facing headwinds, resulting in subdued corporate loan growth for banks during the first quarter of FY26.

Several factors contribute to this lag in disbursement. Muted capital expenditure (capex) by companies, the availability of cheaper alternatives in the money market, and ongoing repayments are key reasons why companies are not readily drawing from the credit lines.

Interestingly, public sector banks (PSBs) are outperforming their private counterparts in key metrics. In the June quarter, PSBs reported a credit rate growth of 11%, surpassing the 8.1% growth of private banks (PVBs). This turnaround began in FY25, marking the first time in 14 years that PSBs outpaced private banks in loan growth, achieving 13.1% year-on-year growth compared to PVBs' 9%. Furthermore, PSBs have shown improvements in asset quality, while private banks have experienced a sharp increase in slippages.

The incremental share of bank credit in overall resources raised by India Inc. has seen a drop. According to a report by SBI Research, the share decreased from 44.6% in FY24 to 31.3% in FY25, and further down to 22% in Q1FY26. During this period, there was a significant rise in resources from the debt capital market through corporate bonds and commercial papers.

In August 2025, PSBs have attracted significant investor interest, outperforming private peers and beating benchmark indices. The Nifty PSU Bank index has gained 3.30% so far in August, while the Nifty Private Bank index declined by 0.40%. This outperformance is attributed to the healthy figures posted by PSBs in the June quarter, driven by credit growth in retail, agriculture, and MSME sectors, along with improving asset quality and rising treasury gains.

The government has been supportive of PSBs, providing capital injections of ₹3.15 lakh crore since the asset quality review (AQR) in 2015. This support has helped PSBs to improve their financial performance, with the banking sector as a whole reaching record-breaking profits in FY25. PSBs demonstrated remarkable growth with a 26% increase in profits, closing in on private banks' 7% growth.

Despite the large sanctioned loan pipelines, India Inc. is holding back on utilizing PSU bank credit due to a combination of factors including muted capex, cheaper money market options and ongoing repayments. PSBs are also slated to launch new products to further push credit growth across various sectors.