Government-owned banks are often inefficient but can stabilize economies during
downturns. Using difference-in-differences analyses of Indian banks during the Covid-
19 crisis, we show that government-owned banks significantly expanded lending, espe-
cially in severely impacted regions. However, contrary to prior literature, these banks
outperformed private banks, achieving higher profitability, lower non-performing loans,
and better stock market performance without compromising lending quality. We at-
tribute this outperformance to pre-pandemic policy interventions, including the adop-
tion of digital banking and regulator-driven balance sheet clean-ups, which enabled
sustainable counter-cyclical lending. Deposit growth and non-banking activities do
not explain the observed increases in lending and profitability.