The finance ministry has called a meeting of heads of public sector banks on Friday to review financial performance and credit flow to agriculture and MSMEs amid the ongoing West Asia crisis. According to The Hindu BusinessLine, this meeting is scheduled to be chaired by Financial Services Secretary M Nagaraju, a day ahead of his superannuation. The review comes after public sector banks posted record profits of ₹1.98 lakh crore in the financial year ended March 2026, marking the fourth consecutive year of profitability for state-owned banks. The meeting will also deliberate on regional rural banks and their financial performance, along with discussions on AI and digital frauds and progress with the Jan Samarth portal. Additionally, there will be deliberations on recovery mechanisms and progress under debt recovery tribunals (DRTs) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.
The Economic Advisory Council to the Prime Minister (EAC-PM) has released a comprehensive working paper examining the economic impact of India's priority sector lending framework. According to the report, priority sector lending has been operational in India for almost five decades and mandates banks to direct at least 40% of their overall credit towards the priority sector. The policy framework was designed to address systemic equity gaps by ensuring credit flow to small and marginal farmers, micro enterprises and weaker sections.
While earlier studies have shown that directed lending policies helped reduce rural poverty and improve investment and firm performance, the EAC-PM's analysis reveals more nuanced findings. As reported by The Economic Times, priority sector advances have been correlated with a decline in rural poverty and an increase in firm and agricultural investment and firm performance. However, the report warns that such lending policies also carry significant risks, including potential harm to total factor productivity and impact on bank profitability due to asset default and high asset management costs. The report specifically notes that diversion of credit to potentially inefficient sectors can harm total factor productivity, highlighting the trade-offs inherent in directed lending policies.
The EAC-PM conducted a detailed analysis using district-level quarterly RBI data between 2020 and 2025 to assess the impact of priority sector advances on output growth. According to the report, an increase in PSA growth rate does not significantly impact a district's output over a two-year horizon. The analysis found considerable variation across districts, with the bottom 10 percentile of districts having the lowest elasticity compared to other district tiers in terms of outstanding PSAs. Using night time luminosity as a proxy for economic activity, the report confirmed that PSA growth rate does not translate into proportionate economic output growth over the observed period.
The EAC-PM cautioned against indiscriminate expansion of directed credit, warning that forcing additional credit allocation to poorer districts through a top-down mandate may not be efficient in terms of growth. Instead, the report suggests that targeted interventions that holistically tackle binding development constraints including access to finance are likely to give better outcomes. The analysis emphasizes that while PSL has been successful in promoting financial inclusion, the focus should shift toward more effective implementation strategies that align with local economic conditions and development needs. The report examined the functioning of Priority Sector Lending Certificates (PSLCs), introduced by the Reserve Bank of India in 2016, which help mitigate bank profitability risks from PSAs by allowing banks to trade the fulfilment of priority sector obligations at a market determined rate.
The strong performance of public sector banks in 2025-26 was driven by improved asset quality, healthy credit expansion and higher income. According to The Hindu BusinessLine, aggregate operating profit reached ₹3.21 lakh crore, while aggregate net profit increased by 11.1 per cent year-on-year to a historic high of ₹1.98 lakh crore. The aggregate business of PSBs increased to ₹283.3 lakh crore as of March 31, 2026, registering growth of 12.8 per cent over the previous year. Gross advances registered growth of 15.7 per cent to ₹127 lakh crore, indicating sustained credit demand across sectors. Asset quality improved significantly with gross NPA ratio declining to 1.93 per cent and net NPA ratio to 0.39 per cent as of March 31, 2026, while total recoveries stood at ₹86,971 crore. Aggregate deposits rose 10.6 per cent to ₹156.3 lakh crore, reflecting continued depositor confidence and strong resource mobilisation by PSBs.
