PSBs’ Low Credit to Labour-Intensive Sectors Raises Concerns

Over the past few months, the Finance Ministry has raised alarm bells over a troubling trend: public sector banks (PSBs) have been lending insufficiently to labour-intensive sectors — manufacturing, mining, MSME, and core engineering — for the last five years (up to FY 25). These sectors are critical engines of job creation, export growth, and industrial ramp-up; however, PSBs’ lending activity does not seem to be aligned with these national priorities.

What the Numbers Show

• Excluding loans above ₹100 crore, credit growth in finance, trade and professional services, electricity, and construction was up 17.7%. For manufacturing and mining, PSB credit growth was almost nil – a measly 1.3%. 

• Conversely, small ticket loans – loans under ₹10 crore – to agriculture and retail increased dramatically to engender growth of approximately 92% and 98%, respectively. However, these are low-value loans, not large investment credits. 

• In terms of smaller loans, PSB loan growth is essentially negligible because the CAGR between ₹10 -100 crore remains near zero, while private banks are growing even higher across almost all segments.

Why is this Important

• Jobs and Exports Threatened: The jobs and exports of certain sectors are under threat, specifically as external factors, such as high tariffs, are undermining export competitiveness. Less credit means less capacity to invest, modernize, or grow, which will result in fewer jobs.

• Skewed Credit Growth: Most of the growth in public sector bank credit is attributed to smaller loans, rather than the large, capital-intensive investments associated with manufacturing or mining. There seems to be a low risk appetite, limiting credit to the areas that need it most for capital investments.

• Private Banks Filling the Gap: In the meantime, private sector banks have more aggressively grown credit liabilities to MSMEs, agriculture, and manufacturing than PSBs, resulting in a steady erosion and loss of PSB market share in these areas.

What the Government is Asking For

From the Finance Ministry, there are clear, succinct requests for agency over credit product development: PSBs should look beyond large corporates to include mid-market corporates, MSMEs, agriculture, engineering, manufacturing, and start-ups. There is additional pressure to protect Net Interest Margins by increasing deposit mobilisation, expanding the liability side for funding, and diversifying their loan asset portfolio.

Where to Go from Here

• Better Risk Models: PSBs may need to adjust risk measurement models and evaluations for lending to make providing large-value credit to the manufacturing/mining sectors seem less risky.

• Continue in Incentives and Oversight: Establish performance measurements to reward PSBs who provide credit to the sectors requiring the most labour and those with higher export intensity.

• Policy Tools: Priority sector lending targets or government guarantees could provide the much-needed encouragement and support for a higher risk appetite with tiered system guidelines.

Conclusion

The Finance Ministry’s concern about low PSB lending to labor-intensive sectors is more than a banking challenge – it gets into employment, expansion of industry, export strength, and regional development. That is, unless PSBs increase their lending beyond the trend to labor-intensive sectors, India will not utilize its labor base properly, lose manufacturing opportunities, and not enhance export markets.