How public sector banks have emerged as leaders in the home loan segment

Over the past three years, a silent but steady shift has unfolded in India’s home loan market: public sector banks (PSBs) have begun to pull ahead of their private counterparts. Once considered slow-moving and overly bureaucratic, some PSU lenders like Union Bank of India, UCO Bank, and Central Bank, State Bank of India, Bank of Baroda have now emerged as dominant forces in the housing finance space, eating into the market share of private heavyweights such as HDFC Bank, ICICI Bank, and Axis Bank.

This trend reversal is particularly significant when viewed against the backdrop of the past decade, where private banks had gained considerable traction across most retail lending segments. But in home loans, the last three years tell a different story, that is, the post-Covid era.

According to the CRIF report, "Home loans growth in India has surged significantly over the last few years, driven by low interest rates, increasing urbanisation, and favourable government policies. As of March 24, portfolio outstanding of home loans stood at ₹ 36.2 lakh crore. Y-o-Y growth in originations value stood at 9.2% by value and 2.6% by volume in FY24. Home Loans are dominated by public sector banks and private banks. Shift in originations is seen from ticket size ₹ 5L -₹ 35L to ₹ 35L+. There is a 32% increase in Average Ticket Size from ₹ 20.1 lakh in FY20 to ₹ 26.5 lakh in FY24, driven by factors such as rising property prices, higher borrowing capacity of individuals, and inflation in general. Home Loans portfolio has witnessed higher delinquency over March 2023."

Private banks lose ground in home loan value share

It is important to look at how different types of lenders contributed to the total value of home loans each year. From FY2022 to FY2024, private banks have seen a drop in their share, going from 42.2% to 36%. In contrast, public sector banks have slightly increased their share from FY2022 to FY2024, going from 36.6% to 40.4%. This means more loan money is now coming from public banks and also from Housing Finance Companies (HFCs). Although private banks still have a strong presence, borrowers are slowly turning to other lenders, likely due to better loan terms or services offered by public banks and HFCs.

Loan count shows rising preference for public banks and HFCs

It is also pertinent to look at how many home loans were given by different lenders, regardless of the amount. Public sector banks have sustained their loan volume at around 38.5% between FY2022 and FY2024. HFCs have also grown, while private banks have seen their share fall to 22.6% in FY2024 from a high of 27.9% in FY2022. This suggests that more people are choosing public banks and HFCs for home loans, possibly because they offer smaller loans or better accessibility. It’s a sign that the market is changing, with borrowers exploring more lending options beyond private banks.

Key drivers of PSU dominance

1. Lower interest rates: PSU banks have consistently offered more competitive interest rates on home loans compared to private banks. SBI, for instance, often introduces limited-period rate cuts during festive seasons, which significantly boosts uptake.

Ratan Chaudhary, head of home loans, Paisabazaar, said, "One of the major reasons for PSU banks gaining market share in the home loan segment is their lower interest rates. The lower cost of funds of PSU banks provides them a distinct advantage in aggressively pricing home loans.”

Adding to it, Adhil Shetty, CEO, BankBazaar.com, “In a loan market where most borrowers are salaried and looking to save money, the interest rate becomes the most important factor. Public sector banks understand this, and price their loans accordingly.”

Lending rates offered by public sector banks are often lower, starting from around 7.75% per annum, while private banks are usually a notch higher.

2. Trust and accessibility: In Tier 2 and Tier 3 cities, PSU banks continue to enjoy strong brand loyalty. Their extensive physical branch networks and government-backed credibility give borrowers confidence, especially first-time homebuyers. PSU banks also enjoy a high level of trust. They are seen as more stable and “safer” by the average consumer, especially in smaller cities. Their widespread branch networks and longstanding relationships with salaried borrowers, particularly government employees, have helped deepen this trust.

“The wider branch network of PSU banks, especially in the semi-urban and rural areas, also provides them more visibility and a wider consumer base for loan distribution. Moreover, the majority stake of the Central Government in PSU banks and their long-standing legacy still inspires borrowers’ confidence and preference among a large segment of the population," said Chaudhary.

3. Regulatory push: Government initiatives like PMAY (Pradhan Mantri Awas Yojana) and credit-linked subsidy schemes have largely routed benefits through PSU banks. These banks have been more proactive in onboarding borrowers under these schemes.

4. Risk appetite and conservative lending by private banks: Post-Covid, private lenders have become more cautious in retail lending, particularly in unsecured and large-ticket loans. PSU banks, on the other hand, have capitalised on the demand rebound by aggressively targeting salaried customers and affordable housing segments.

“Public sector banks have also been proactive post-pandemic. They were quick to cut rates and pass on the benefits to customers in a bid to remain competitive. Many waived processing fees and offered festive discounts, making them more attractive to first-time homebuyers,” said Adhil Shetty, CEO, BankBazaar.com.

However, these advantages don’t make private banks any less relevant. “Private lenders offer faster processing and better digital experiences. They also cater more actively to self-employed and higher-income customers,” said Shetty.

The shift is strategic, not cyclical

What’s unfolding isn’t just a temporary shift but a structural realignment. PSU banks have overhauled their credit assessment processes, digitised home loan origination, and partnered with developers to offer pre-approved projects. These measures have improved turnaround times and customer satisfaction. For instance, many PSU banks are now readily approving home loans for the stalled Amrapali projects in the Delhi-NCR region, which are being revived by NBCC.

While private banks still have an edge in premium customer experience and digital loan delivery, PSUs are quickly catching up. If this trend continues, PSU banks may not just lead in loan volumes but also begin to compete strongly on service parameters.

As India’s housing demand continues to grow, especially in smaller cities and among middle-income groups, PSU banks appear well-positioned to stay ahead in the home loan race, a race that not long ago, many thought they had already lost.

What should borrowers do?

Shetty advised that borrowers shouldn’t base their lender choice solely on interest rates. “It’s important to look beyond the headline rate and evaluate other critical factors such as loan terms, service quality, reset clauses, and the margin added over the repo rate,” he said. He also warned that an attractively low rate might sometimes mask a higher spread or come at the cost of poor customer service. “Since a home loan is a long-term financial commitment, borrowers should take the time to compare lenders carefully and choose one that offers both transparency and good service,” Shetty added.