Finance ministry asks PSBs to broaden credit focus amid tariff woes

The finance ministry has asked public-sector banks (PSBs) to broaden their credit focus beyond large corporations to include mid-market companies, small and medium enterprises, agriculture, and startups, a senior government official said. The direction comes in the wake of the 50 per cent US tariff on Indian exports, which may adversely impact labour-intensive sectors.

 

“PSBs have been told to focus on credit growth across loan sizes, especially in core engineering, manufacturing, agriculture, MSMEs, and startups,” the official said.

 

The finance ministry on Wednesday reviewed the first-quarter financial performance of PSBs. The meeting, chaired by Financial Services Secretary M Nagaraju, was attended by the heads of the banks.

 

The ministry has also asked PSBs to protect their net interest margins (NIMs) through liability-side discipline and asset diversification. NIM measures how much a financial institution earns from its lending activities after paying interest on borrowed funds (like deposits), relative to its total interest-earning assets.

 

“By widening the product portfolio — expanding into higher-yield segments like MSMEs, retail, and new-age manufacturing while maintaining stable corporate and infrastructure lending — we can contain margin compression risks. At the same time, fee-based products and cross-sell opportunities provide a buffer to spreads. This diversified approach cushions NIMs against interest rate cycles and supports sustainable profitability,” a banker said.

 

Banks have also been instructed to strengthen recovery mechanisms through one-time settlements and the joint lenders’ forum.

 

The push comes against the backdrop of PSBs steadily losing market share in advances to private-sector banks (PVBs) across all major segments over the past five years. In lending to MSMEs, PVBs grew at a compound annual growth rate (CAGR) of 21.1 per cent between 2019-20 (FY20) and 2024-25 (FY25), far outpacing PSBs at 6.7 per cent during the same period. As a result, the PSB share in MSME advances fell from 55.7 per cent in March 2020 to 40.8 per cent in March 2025.

 

In the industry segment, the PSB share slipped from 59.3 per cent in FY20 to 55 per cent in FY25, as PVBs grew at a 6.8 per cent CAGR compared to 3.2 per cent for PSBs.

 

The sharpest erosion was seen in the retail segment, where PSB share fell from 56.3 per cent in FY20 to 49.5 per cent in FY25, amid faster PVB growth of 21.6 per cent CAGR compared to 14.7 per cent for PSBs. Even in agriculture, traditionally a PSB stronghold, their share slipped to 65.7 per cent in FY25, as PVBs grew at 16.9 per cent CAGR against 12.5 per cent for PSBs.