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Sitharaman Urges Banks to Focus on Core Activities

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  Published in Business and Finance on Tuesday, February 24th 2026 at 2:04 GMT by The Hans India
      Locales: N/A, INDIA

Hyderabad, February 24th, 2026 - Finance Minister Nirmala Sitharaman delivered a pointed message to the heads of public sector banks yesterday, urging them to refocus on core banking activities and curtail diversification into non-financial ventures. The directive, issued during a high-level review meeting in Hyderabad, signals a growing concern within the government regarding the financial health and efficiency of several state-owned banks, particularly in light of persistent challenges with non-performing assets (NPAs).

Speaking to bank chiefs, Sitharaman emphasized the fundamental purpose of banking institutions. "Banks are established to serve financial needs and have a responsibility to ensure they remain focused on that purpose," she stated. This message appears to be a response to a trend of public sector banks increasingly exploring avenues outside traditional lending - from insurance products and real estate ventures to, in some cases, even unrelated manufacturing or service industries. While diversification can sometimes enhance revenue streams, the Finance Minister argued that it distracts from the core mission and potentially weakens a bank's ability to effectively manage risk and serve its primary clientele.

The call for a return to core functions is particularly salient given the ongoing struggle with NPAs - loans where borrowers have defaulted. While significant progress has been made in recent years through the Insolvency and Bankruptcy Code (IBC) and other recovery mechanisms, the issue remains a drag on the financial system. Sources close to the meeting indicated that Sitharaman specifically pressed banks to accelerate NPA resolution and implement robust measures to prevent further accumulation of bad loans. This includes strengthening credit appraisal processes, enhancing risk management frameworks, and proactively identifying and addressing potential vulnerabilities in loan portfolios.

"The Minister wasn't simply asking banks to stop diversifying," explained a senior Finance Ministry official, speaking on condition of anonymity. "She was making a clear point that priority one must be strengthening financial resilience and ensuring lending capacity is optimized to fuel economic growth. Resources spent on non-core activities are resources not available for essential lending."

The directive comes at a crucial juncture for the Indian economy. While growth remains robust, sustaining momentum requires significant investment in key sectors such as infrastructure, manufacturing, and agriculture. Banks play a pivotal role in channeling funds to these productive areas. Sitharaman stressed that banks must remain competitive and responsive to the evolving needs of a rapidly growing economy. This necessitates not only adequate capital but also streamlined lending processes and a willingness to innovate within the established financial framework.

The meeting also included a discussion of banks' performance in lending to priority sectors - those designated by the government as requiring special attention, such as small and medium-sized enterprises (SMEs), agriculture, and education. Banks were urged to meet and exceed targets for lending to these sectors, as they are seen as crucial for inclusive growth and job creation. The implementation of various government schemes, designed to support economic activity and provide financial assistance to vulnerable sections of the population, also came under review. Ensuring these schemes are effectively delivered through the banking system is seen as a key priority.

Analysts suggest that Sitharaman's message is a clear signal that the government is prioritizing financial stability and sustainable growth over short-term diversification gains. The move aligns with a broader global trend of regulators urging banks to focus on their core competencies and maintain adequate capital buffers in the face of increasing economic uncertainty. The potential for increased scrutiny of bank diversification plans is now high, and banks are likely to face pressure to justify any ventures outside traditional banking activities. The Finance Ministry is expected to follow up on the meeting with detailed guidelines outlining the scope of acceptable non-financial activities and establishing clear benchmarks for performance and risk management. The coming quarters will reveal how effectively these directives are implemented and whether they can help to strengthen the foundation of the Indian banking sector.