PSBs' Dividend Bonanza Grows 166% in 4 Years Amid Profit Surge

Backed by strong profitability and improved asset quality, India's public sector banks (PSBs) have significantly increased dividend payouts over the last four years. According to data compiled by The Indian Express, the total dividend disbursed by state-run lenders surged by 166%, from ₹13,170 crore in FY22 to ₹34,992 crore in FY25. This upward trajectory in dividend transfers has been a direct outcome of robust financial metrics, higher loan growth, and a concerted effort to clean up bad loans.

For the Centre, which holds a majority stake (ranging from 57% to 95%) in these banks, the payout has translated into a windfall. The government’s dividend receipts from PSBs alone are projected to rise by 160%, reaching ₹22,773.96 crore in FY25 from ₹8,761 crore in FY22.

MSMEs: Indirect Beneficiaries of Stronger PSBs

While MSMEs are not direct recipients of these dividends, the broader financial health of PSBs has important implications for the sector. With improved capital buffers and reduced NPAs, public sector banks have been better positioned to lend to MSMEs—a segment often underserved during periods of financial stress.

The aggressive clean-up of balance sheets has played a key role. Gross NPAs of PSBs fell to 2.8% as of March 2025 from 5.9% in March 2022, while net NPAs dropped to a mere 0.5% from 1.7%, according to RBI data. This decline has freed up bandwidth for banks to lend to riskier sectors like MSMEs.

"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," The Indian Express quoted Anil Gupta, Senior Vice President & Co-Group Head – Financial Sector Ratings at ICRA, as saying.

SBI Leads the Pack

Among all PSBs, the State Bank of India (SBI) remains the top contributor to the government's dividend kitty. With the Centre holding a 57.43% stake in SBI, it is expected to receive ₹8,149 crore in dividends from the bank alone in FY25.

Saswata Guha, Senior Director for Financial Institutions at Fitch Ratings, told The Indian Express, “The 166% increase in dividends 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 20-22% of net profit.”

Profitability Surge, But Clouds Ahead

From FY22 to FY25, the combined profit of public sector lenders soared by 144%—from ₹73,142 crore to ₹1.78 lakh crore. But despite this golden run, analysts are cautious about FY26.

One reason is the RBI’s 100-bps cut in the repo rate so far in 2025, which is expected to compress net interest margins (NIMs). Lower NIMs coupled with moderate loan growth could dampen earnings and thereby impact dividend payouts.

“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 into a muted earnings growth for the banking sector, including PSBs,” The Indian Express quoted ICRA’s Anil Gupta.

According to CareEdge Ratings, NIMs for domestic banks may decline by 20–25 basis points in FY26. Return on total assets could also dip from 1.34% in FY25 to 1.15% in FY26.

QIPs May Dilute Government Stake

Further compounding the expected decline in dividend income is the capital-raising plan of several PSBs through Qualified Institutional Placements (QIPs) and other equity routes. SBI, for instance, is set to raise up to ₹25,000 crore via QIP, while Union Bank of India has secured board approval to raise ₹3,000 crore.

These moves, while essential to meet minimum public shareholding norms and boost Tier-1 capital, will dilute the government's stake and could translate to lower dividend income next fiscal.

Outlook for MSMEs

For the MSME sector, the dividend trends are a bellwether of PSBs’ financial health. While direct implications may be limited, the fact that PSBs have been on a stronger footing has led to more lending confidence. However, if profitability dips and capital becomes constrained, MSMEs could once again find themselves squeezed for access to affordable credit.

With profitability under pressure and possible policy recalibrations ahead, MSMEs must stay alert to changes in lending appetite from their primary banking partners in the public sector.

Bottom Line:
The 166% surge in PSBs' dividend payouts over four years reflects a banking sector in revival mode. However, FY26 may bring tempered expectations, both for government coffers and MSME borrowers, as profitability plateaus and capital dilution loom.