Stockgram

Dividends from public sector banks (PSBs) to the government are set to have risen sharply to ₹22,000 crore in FY25, 22% higher than the ₹18,000 crore received in FY24. This increase mirrors robust earnings and healthier balance sheets, as PSBs posted a record ₹1.78 lakh crore in net profit in the last fiscal—a 26% rise year-on-year.





While this performance marks a high point in profitability, headwinds are emerging that could dampen the momentum in the current financial year.





A key challenge lies in the higher cost of funds. Several PSBs, especially the smaller ones, have raised bulk deposits at steep rates—between 7.85% and 7.95%—in a bid to shore up funds to lend.





However, with the Reserve Bank of India lowering the repo rate, banks may not have the room to increase lending rates proportionately. This imbalance is likely to squeeze net interest margins (NIMs), a critical profitability metric for lenders.





A senior public sector banker told CNBC-TV18 that while an average NIM of around 3% (excluding SBI) would still be “decent” under current circumstances, the risk of margins slipping below that mark is higher.





The margin squeeze is expected to moderate profit growth in FY26. While profits are still projected to rise, the 26% year-on-year growth seen in FY25 may not be repeated. Instead, PSBs are likely to see a more measured earnings trajectory and tighter spreads.





In sum, while PSBs continue to deliver higher returns to the exchequer, FY26 may test their resilience amid narrowing margins and a shifting rate environment.