Public sector banks lose big as pension fund deposits plunge 87% in 5 years

Public sector banks see sharp erosion in pension fund and household deposits, while private banks capture larger shares amid rising demand for returns and convenience

Public sector banks (PSBs) have witnessed a steep decline in deposits from pension funds over the past five years, even as the overall banking system benefited from this segment.

 

Data sourced by Business Standard show that pension fund deposits with PSBs fell nearly 87 per cent—from ₹22,516 crore in March 2020 to just ₹2,969 crore by March 2025.

 

In contrast, the aggregate deposits of pension funds with all scheduled commercial banks (SCBs) more than doubled in the same period, reaching ₹66,883 crore.

 

“This indicates that private banks have cornered a larger share of this long-term, stable deposit pool, at the expense of state-owned lenders,” said a senior bank official.

 

Household deposits under pressure 

The household sector, traditionally the backbone of deposit mobilisation for PSBs, also shows signs of strain. In FY25, PSBs accounted for only 50.3 per cent of incremental deposits from households. This translated into a loss of about 706 basis points in market share, suggesting savers are diversifying towards private sector banks and other avenues.

 

“Pension funds are increasingly prioritising higher returns and digital convenience, areas where private banks have been more aggressive with tailored products and relationship management. PSBs, despite their wide branch network, have not been able to match that sophistication. But soon we will cover this pace,” said another senior bank official.

 

Deposit share shifts to private banks 

PSBs have also witnessed a steady decline in their share of government deposits, slipping from 77.5 per cent in March 2020 to 73.6 per cent in March 2025. Private banks, in contrast, rose from 22.1 per cent to 25.6 per cent during the same period.

 

A sharper shift is visible in household deposits. PSBs’ share dropped significantly from 70.6 per cent to 63.0 per cent, while private banks improved their share from 27.1 per cent to 34.1 per cent, signalling a growing preference among households for private lenders.

 

“Over the last few years, households have been diversifying into private banks and even market-linked products. The loss of incremental deposits is less about erosion of trust in PSBs and more about customers seeking convenience, competitive rates, and product variety,” explained a third senior bank official.

 

Finance ministry push for mobilisation 

In June 2025, Union Finance Minister Nirmala Sitharaman told PSBs that sustained efforts were needed to improve deposit mobilisation to support ongoing credit growth. She emphasised the need to deepen corporate lending in productive sectors while maintaining robust underwriting and risk management standards.

 

“PSBs were advised to undertake special drives, make effective use of their branch networks, and deepen outreach in semi-urban and rural areas,” the finance ministry said.

 

Last week, the ministry reviewed the first-quarter financial performance of PSBs. The meeting, chaired by Financial Services Secretary M Nagaraju, was attended by the heads of the banks.

 

In the same meeting, PSBs were asked to protect their net interest margins (NIMs) through liability-side discipline and asset diversification. NIM measures how much a financial institution earns from its lending activities after paying interest on borrowed funds, relative to its total interest-earning assets.