Centre targets ₹20,000-25,000 crore dividend from public sector banks in FY25

The projected inflow will strengthen non-tax revenue and support the government’s fiscal consolidation efforts.

The Centre received about ₹18,000 crore in dividends from state-owned lenders in FY24 and ₹13,804 crore in FY23.

This optimistic outlook follows a record ₹1.78 trillion in combined net profit posted by all 12 public sector banks in FY25, marking a 26% increase over the previous year’s ₹1.41 trillion.

The payouts will be accounted for in FY26 by the Centre.

“The strong financial performance of public sector banks will yield higher dividends this year," the first person mentioned above said.

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“Higher dividends from PSU banks will enhance the government’s capacity to fund key initiatives without increasing the fiscal deficit," the person added.

Central capital expenditure increased by 47.7% annually in the third quarter (Q3) of FY25, surpassing the 10.3% growth recorded in Q2, on the back of higher post-election spending.

Capital expenditure by major states grew by 5.9% in Q3 FY25, following contractions in both Q1 and Q2.

“Robust dividend inflows from PSU banks provide the government with greater fiscal flexibility to pursue growth-oriented programmes and capex spending," the second person said.

“Coupled with steady loan growth and the potential for an RBI (Reserve Bank of India) rate cut, along with a favourable monsoon, these factors are expected to accelerate economic momentum in the coming quarters," added the person mentioned above.

FY26 deficit at 4.4% despite global headwinds

On 17 May, Mint reported that the Centre aims to achieve its fiscal deficit target of 4.4% of gross domestic product (GDP) in FY26 despite uncertainties. India’s fiscal deficit in FY25 stood at 4.8% of GDP under revised estimates.

The Union budget had set a non-tax revenue target of  ₹5.83 trillion for FY26—made up of ₹47,738 crore from interest receipts,  ₹3.25 trillion from dividends and profits comprising contributions from the central bank, state-run banks and central public sector enterprises, and  ₹2.07 trillion from other non-tax sources.

The Centre expects an all-time high  ₹2.3-2.5 trillion in surplus transfer from the RBI.

During FY25, the RBI had approved a dividend of  ₹2.11 trillion for FY24.

A finance ministry spokesperson didn't respond to emailed queries.

PSBs narrowing gap with private banks

Experts said state-run banks have significantly closed the gap with private peers in profitability and net interest margins (NIM) over the past three-four years, which has allowed them to disburse high dividends to the central government.

With loan growth, stable asset quality, high NPA (non-performing asset) coverage and strong capital adequacy, public sector banks’ average return on assets has nearly doubled from 0.52% in FY23 to 0.96% in FY25, said Pratik Shah, national leader, financial services, EY India.

"This prompted PSU banks to declare generous dividends to the central government during FY23 and FY24… PSUs are expected to continue declaring robust dividends in FY25 amid sustained growth in profitability," he said.

“Besides healthy advances in growth, PSU banks must look at other operating leverage, which would translate into robust profitability, going forward. There is significant potential to increase other income by capturing a larger share of fee and commission income from trade finance and forex," he added.

Vivek Iyer, partner and financial services risk leader at Grant Thornton Bharat, said public sector banks have posted higher profits on account of better credit growth, improved asset quality due to lower portfolio stress, and lower cost of borrowings compared with private sector banks, all of which indicate a better dividend expectation from shareholders.

“The government has been a shareholder that has been infusing capital into the banking system when required, and expecting a higher dividend is a rational expectation to have in a good year," he said.

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“We believe that the PSBs will be able to strike the right balance between reinvestment and dividend payout. Growth in the current fiscal will be driven to a large extent by the MSME (micro, small and medium enterprise) portfolio and higher NIMs, given the expected fall in the cost of funds and the right mix of high-yield credit portfolio," Iyer added.

“Growth in the Indian banking sector this year will be propelled by strong domestic credit demand, improving banking sector liquidity conditions, and a falling interest rate scenario amid easing inflation and tax relaxation. Loan books are projected to grow by around 12% in FY26, driven by robust demand from rural and urban markets," said Ajay Kumar Singh, general manager, strategic management and economic advisory division, Punjab National Bank.

“Apart from the above, strengthened balance sheets and rising profitability in both public and private banks will further support lending activity, while the revival in private capex is likely to work as a catalyst," he added.