4 days ago
Backed by strong profit growth, PSBs' FY25 dividend transfers up 166% in 4 years
Driven by robust growth in profitability, public sector banks (PSBs) have seen a 166 per cent surge in total dividend payouts to shareholders, including to the government, between 2021-22 and 2024-25.
The total dividend paid by state-run banks to shareholders increased from Rs 13,170 crore in 2021-22 to Rs 34,992 crore in the financial year ended March 2025, data compiled by The Indian Express showed.
As a result, the central government is also likely to see a jump of 160 per cent in dividend from public sector banks to Rs 22,773.96 crore in 2024-25 from Rs 8,761 crore paid in 2021-22 on account of its majority stake in these lenders. The Centre's stake in PSBs ranges from 57 per cent to 95 per cent as of end-March 2025.
Among public sector banks, the government gets the highest dividend from State Bank of India (SBI), the country's largest lender, in which it holds 57.43 per cent stake. In 2024-25, the government is expected to receive Rs 8,149 crore as dividend from SBI.
'The 166 per cent increase in dividends (paid by state-run banks) also has to do with the way profitability has grown. So, if you look at it as a percentage of profit, the dividend distribution rate of public sector banks has been hovering between the 20-22 per cent of net profit,' said Saswata Guha, Senior Director, Financial Institutions (Banks), Fitch Ratings.
'Moreover, the Prompt Corrective Framework also prescribes clear conditions for financial soundness and dividend distribution, which banks must meet to pay dividends. Considering the sector's improved financial health, lenders also satisfy those conditions,' he said.
Under the Prompt Corrective Action (PCA) framework, banks have to monitor and maintain certain minimum levels of common equity tier-1 ratio, net non-performing asset (NPA) ratio, and return on assets. Any breach of a risk threshold by a bank results in the invocation of the PCA, which leads to the imposition of a variety of business restrictions.
In the last four financial years, state-run lenders' profit rose 144 per cent to Rs 1.78 lakh crore from Rs 73,142 crore in 2021-22.
PSBs have become more profitable in the last four years on account of improvement in various financial metrics, including higher loan growth and reduction in NPAs, mainly due to loans being written off, analysts said.
'The improvement in asset quality and capital position after the massive recapitalisation of PSBs by the government has supported their loan book growth as well as earnings leading to consistent increase in dividend payments,' said Anil Gupta, Senior Vice President and Co Group Head – Financial Sector Ratings, Icra Ltd.
As of end March 2025, gross NPAs of public sector banks declined to 2.8 per cent from 5.9 per cent as of March 2022, while net NPAs fell to 0.5 per cent from 1.7 per cent, according to the RBI data.
Analysts believe state-run lenders may not be able to maintain the pace of dividend transfers to shareholders in 2025-26 due to a likely fall in profitability. The decline in profit may be on account of a lower net interest margin (NIM) following a 100 basis points (bps) reduction in the policy repo rate by the RBI so far in 2025.
Whenever there is a reduction in the repo rate, banks' interest income from loans falls immediately, while their interest outgo on deposits readjusts with a lag. This puts pressure on their profit margins. 'As the loan book growth is expected to moderate further in 2025-26, which coupled with pressure on net interest margins is expected to translate in a muted earnings growth for the banking sector, including PSBs,' said Icra Ltd's Gupta.
According to a recent report by CareEdge Ratings, NIMs of domestic banks is expected to decline around 20–25 bps in 2025-26 compared to 2024-25 due to a declining interest rate scenario, with yield on advances expected to fall more than the cost of deposits in the current financial year. Overall, profitability of banks may be impacted by around 12-15 bps, with estimated Return on Total Assets of 1.15 per cent in 2025-26, down from 1.34 per cent in 2024-25 due to pressure on NIMs and uptick in credit costs, the CareEdge report said.
Banking analysts also said that qualified institutional placement (QIP) by certain public sector lenders — to meet the minimum public shareholding criteria in some cases — will lead to a reduction in the government's stake in these banks, resulting in lower dividend transfers in 2025-26 compared to 2024-25. The country's largest lender, SBI, is in the process of raising up to Rs 25,000 crore through the QIP route. Last month, state-run lender Union Bank of India received board approval to raise up to Rs 3,000 crore of equity capital through public issue or rights issue or private placement, including QIP.
'The moderate growth in earnings for banks coupled with expected dilution in shareholding of government upon the capital raise by few PSBs could translate in muted growth in dividends receipts of the government,' said Gupta from Icra Ltd.
