Govt expects even higher dividend of ₹20,000 crore from public sector banks in FY25

New Delhi: The government expects public sector banks (PSBs) to pay higher dividends in FY25 than in the previous year, two people aware of the matter said, citing hopes of higher profit, a stronger growth in loan books, higher margins and robust credit offtake in the country’s heartland. 

The government has budgeted for a conservative growth of dividends in FY25 at around ₹20,000 crore on the back of relatively slower growth projected for the year and continuing geopolitical uncertainty impacting the investment climate, one of the people mentioned above said.

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“However, a strong pick-up in rural demand in the first two quarters of current fiscal has helped in further strengthening public sector banks’ balance sheets with most PSBs now hopeful that business growth may return good numbers in FY25,” the person added.

The other person said that while the profitability of these state-run banks has continued to improve, with loan growth holding up, an interest rate cut by the Reserve Bank of India and a good monsoon is expected to give further impetus to the economy. 

"The pick-up of private sector investments during the year, as compared with the previous year, will also help banks improve their profitability and likely result in higher dividend payout for the Central government," this person added.

Capex-led

During Q1, FY25, capital investment growth increased to 7.5%, up from 6.46% in the previous quarter, due to an increase in private sector and household spending, even as government spending shrank due to the general election.

The Centre received ₹18,000 crore in dividends from PSBs during FY24, up from ₹13,800 crore in the previous year. The 30% rise was on the back of a strong financial performance by banks.

"The dividend payout in FY25 is expected to be over ₹20,000 crore. However, it would depend on a lot of factors, including external factors like the geopolitical situation, etc., which could impact the banking sector," the second person mentioned above said.

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

Experts said a trend analysis of recent performance by PSBs indicates that profitability continues to be improving with loan growth holding up consistently in line with the industry, Net Interest Margins (NIMs, or the difference between interest paid and interest earned) at the upper end of the long-term range, stable asset quality, high coverage on bad assets, and adequate capital levels.

"Average ROA (return on assets) of the PSU banks has almost doubled from 0.52% in FY23 to 0.95% in FY24. Average ROE (return on equity) also surged from 9.3% in FY22 to 16.8% in FY24. Consolidated net profit of PSU banks surged to a record high level of ₹1.41 trillion (134.9% YoY growth)," said Pratik Shah, financial services leader, EY India, adding that it was these factors that helped PSBs declare generous dividends to the Central government in FY23 and FY24.

"The profitability of the PSU banks is expected to be under pressure in FY25 with the rising cost of deposit and the expectations of a rate cut in H2 FY25... However, notwithstanding the margin compression, the growth in loan books (12%-12.5% in FY25) shall translate into steady operating profits, aided by benign credit costs," Shah said.

This growth, he added, will help PSU banks maintain a dividend payout ratio of 10-11% – in line with the trend in the last two years, though any higher payout would depend on their ability to create additional operating leverage from other businesses.

Rural demand may rise

Meanwhile, Shravan Shetty, managing director of Primus Partners said while global headwinds could have some adverse impact on the Indian economy and banking sector, a pick-up in rural demand is expected due to good monsoons.

"This should help both the retail and corporate portfolios of banks. Also, with the rate cycle reversing all across the globe, we expect the RBI to follow, leading to better NIMs for banks leading to higher profits," Shetty added.

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According a report on the banking sector by Motilal Oswal, despite short-term challenges, public sector banks are on track to posting a compound annual growth rate (CAGR) of 15% between FY24 and FY26, pointing to sustained long-term growth. 

Another good development for PSBs has been a pick-up in deposit growth in the second quarter of FY25. Deposit growth enables banks to mobilize cheaper funds for lending, thereby helping to raise margins.