Synopsis: The Union Budget 2025 introduces measures to bolster MSME lending and stimulate consumption through tax relief. However, it raises concerns over increased government borrowing and potential agricultural loan risks. Notably, structural reforms such as public sector bank privatization and insolvency process streamlining were not addressed.
Finance Minister Nirmala Sitharaman's Union Budget 2025 presents a mixed outlook for the banking sector.
While it offers targeted support for Micro, Small, and Medium Enterprises (MSMEs) and aims to boost consumption through tax relief, apprehensions persist regarding escalating government borrowing and the associated risks in agricultural lending.
Enhancements in MSME Lending:
A significant highlight is the expansion of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
This initiative is expected to unlock ₹1.5 lakh crore in MSME credit over the next five years.
The credit cover for micro and small enterprises has been doubled from ₹5 crore to ₹10 crore, potentially encouraging more lending, especially from private banks aiming to expand their SME portfolios.
Tax Relief and Consumption:
The Budget's decision to exempt income tax on earnings up to ₹12 lakh is anticipated to increase disposable income, potentially leading to higher retail spending.
This surge in consumption could drive demand for consumer credit and deposits, benefiting banks through improved credit growth.
However, with the Reserve Bank of India cautioning against aggressive retail lending, lenders are likely to remain vigilant.
Concerns Over Government Borrowing:
The government's plan to increase borrowing by 5.7% to ₹14.8 lakh crore for FY26 to finance a 4.4% fiscal deficit has unsettled markets, leading to a rise in bond yields.
For banks holding substantial government securities, this could result in mark-to-market (MTM) losses, adversely impacting earnings.
Agricultural Loan Risks:
The hike in Kisan Credit Card (KCC) loan limits from ₹3 lakh to ₹5 lakh raises concerns, particularly for public sector banks (PSBs) with significant rural exposure.
Agricultural credit has surged from ₹13.3 lakh crore to ₹22.2 lakh crore in three years, with farm Non-Performing Assets (NPAs) already flagged by lenders like HDFC Bank.
PSBs, leading in farm lending, could face a rise in stressed assets due to this development.
Absence of Structural Reforms:
While the Budget offers incentives for MSME lending and consumption-driven growth, it falls short in addressing structural reforms such as public sector bank privatization and the streamlining of insolvency processes.
The absence of these reforms may limit the long-term efficiency and competitiveness of the banking sector.
Conclusion:
The Union Budget 2025 provides a balanced approach, offering incentives to stimulate MSME lending and boost consumption through tax relief.
However, the increased government borrowing and elevated agricultural loan limits pose potential risks to the banking sector.
The lack of structural reforms further underscores the need for cautious optimism.
Banks must navigate these developments prudently, balancing growth opportunities with vigilant risk management.
