Finance minister Nirmala Sitharaman is expected meet the heads of public sector banks (PSBs) in July to review emerging stress in loan portfolios amid uncertainty stemming from the West Asia conflict and broader global economic risks, according to two people aware of the matter.
The review comes as the finance ministry steps up scrutiny of potential vulnerabilities in retail, micro, small, and medium enterprises (MSMEs) and agriculture lending, even as state-run banks continue to report strong profitability, healthy credit growth and improving asset quality.
“The meeting will be attended by the managing directors and chief executives of all 12 public sector banks, along with representatives of the Indian Banks' Association (IBA),” said one of the person cited above.
The meeting is expected to focus on banks' performance during the first quarter of fiscal year 2027 (Q1 FY27) and evaluate how ongoing global disruptions could affect credit quality, business growth and overall banking operations.
Mint earlier reported that the finance ministry had asked PSBs to build additional provisioning buffers against emerging stress in retail, MSME and agriculture loans, amid rising early-warning accounts and uncertainty stemming from the West Asia war. The concerns have been amplified by the proposed transition to the expected credit loss (ECL) regime, which could raise provisioning requirements for lenders.
The people cited above said the finance ministry will also review measures undertaken by state-run banks to mobilize deposits, improve credit growth, strengthen financial inclusion efforts and monitor the performance of key government-backed schemes being implemented through banks.
Emerging risks
Deposit mobilization is expected to be in focus, as credit growth of 15.7-16.1% in FY26 outpace deposit growth of 10.6-13.5%, according to Reserve Bank of India data.
The ministry is also monitoring signs of stress in MSME portfolios, including rising early-warning accounts. Analysts have warned of vulnerabilities in unsecured and small-ticket MSME loans if the conflict drags on.
Queries emailed on Wednesday evening to the finance ministry, the Indian Banks' Association (IBA), and all 12 public sector banks—State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India, Indian Bank, Bank of India, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, and Punjab & Sind Bank—remained unanswered till press time.
Experts said overall bank credit growth has remained robust in the first two months of FY27.
“The credit growth of Indian micro, small, and medium enterprises (MSMEs) now includes credit support in Q1 FY27 as the West Asia crisis has impeded cash flows especially of export-reliant segments. To cushion this shock, the government has issued the Emergency Credit Line Guarantee Scheme (ECLGS 5.0) which has prompted banks to sanction over ₹35,000 crore,” said Sanjay Agarwal, senior director, CareEdge Ratings.
Agarwal said that this macroeconomic strain also amplifies the banking sector's transition to the ECL framework which mandates forward-looking provisioning based on the probability of future defaults.
As the West Asia conflict has squeezed MSME operating margins and delayed customer receivables, some small business loans have been showing signs of stress. This accelerates their migration into "Stage 2" asset classification. Under the new ECL rules, this migration triggers a mandatory 5% provisioning floor compared to the historical 0.40% under older rules. Consequently, banks are forced to model higher probability of default overlays across their entire MSME portfolios increasing their provisioning requirements.
The review comes against the backdrop of a strong performance by public sector banks in FY26. PSBs posted a record combined net profit of ₹1.98 trillion last fiscal, marking their fourth consecutive year of profitability, driven by business growth, improving asset quality and greater operational efficiency.
Aggregate business grew 12.8% year-on-year to ₹283.3 trillion in FY26, with deposits rising 10.6% to ₹156.3 trillion and gross advances increasing 15.7% to ₹127 trillion. Credit growth remained broad-based, with retail lending up 18.1%, agriculture credit rising 15.5% and MSME lending increasing 18.2%, according to RBI data.
Asset quality improved further, with the gross non-performing asset ratio declining to a historic low of 1.93% and the net NPA ratio falling to 0.39% as of 31 March 2026. Fresh slippages remained contained at 0.7%, while recoveries, including those from written-off accounts, stood at ₹86,971 crore. The capital-to-risk weighted assets ratio improved to 16.6%, providing banks with a strong capital cushion.