Public sector banks post record profits in FY26 as bad loans fall to historic low

India's public sector banks closed FY26 in their strongest financial position in decades, with gross non-performing assets (NPAs) falling to a record low and combined profit touching an all-time high, underscoring the sector's transformation after years of balance-sheet clean-up.

According to information shared by the finance ministry in the Rajya Sabha on Tuesday, public sector banks' (PSBs) gross NPA ratio fell to 1.9% at the end of FY26, while combined net profit rose to a record ₹1.98 trillion.

Replying to separate questions in the Rajya Sabha, minister of state for finance Pankaj Chaudhary said the financial health of PSBs has improved significantly, supported by stronger balance sheets, sustained credit growth and a sharp decline in stressed assets.

The aggregate business of PSBs expanded to ₹283.3 trillion as of 31 March 2026, up from ₹251.7 trillion a year earlier. Deposits rose to ₹156.3 trillion, while gross loans and advances increased to ₹127 trillion.

Asset quality continued to improve, with gross NPAs declining to 1.9% from 2.6% a year earlier and 7.3% in FY22, the lowest level recorded by public sector banks in recent decades. The capital adequacy ratio strengthened to 16.6%, from 16.1% a year earlier.

The ministry also highlighted broad-based credit growth during FY26. Retail loans grew 19.8% year-on-year, while lending to micro, small and medium enterprises (MSMEs) rose 19.6%. Agricultural credit increased 16.2%, and infrastructure lending grew 4.9%.

The government also said it introduced the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0 in May to support businesses facing temporary liquidity pressures arising from the West Asia conflict. The scheme provides government-backed guarantees for additional loans of up to ₹2.55 trillion, including ₹5,000 crore earmarked for scheduled passenger airlines. It offers 100% guarantee cover for MSMEs and 90% for eligible non-MSMEs and airline borrowers.

Regional banks improve

Separately, the government said regional rural banks (RRBs) also delivered their best-ever financial performance in FY26, posting a record consolidated net profit of ₹10,177 crore alongside improvements in deposits, advances, capital adequacy and asset quality.

RRBs' deposits increased to ₹7.69 trillion from ₹7.14 trillion in FY25, while outstanding loans rose to ₹5.78 trillion from ₹5.24 trillion. Their credit-deposit ratio improved to 75.2%, compared with 73.4% a year earlier.

Asset quality improved modestly, with gross NPAs declining to 5.3% from 5.4% in FY25. Net NPAs, however, edged up marginally to 2.1% from 2.0%. The capital-to-risk-weighted assets ratio strengthened to 15%, while net worth increased to ₹74,086 crore from ₹63,927 crore.

The government said it has been regularly reviewing the performance of RRBs at the national and regional levels, with discussions focused on financial performance, technology upgradation, MSME lending, diversification towards agriculture-allied, retail and MSME loans, and expanding financial inclusion in rural areas.

According to the finance ministry, the Department of Financial Services also periodically monitors RRB performance under flagship financial inclusion schemes, including the Pradhan Mantri Jan-Dhan Yojana (PMJDY), Pradhan Mantri Mudra Yojana (PMMY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and the Atal Pension Yojana (APY).