As India solidifies its position as one of the world’s fastest-growing major economy amid global economic uncertainties, the Union Budget 2025-26 strikes a fine balance between fiscal prudence and a strategic roadmap for long-term growth.
The government’s achievement in bettering its fiscal deficit target to 4.8% for FY25, coupled with a projected deficit of 4.4% for FY26, signals strong macroeconomic management that creates a stable operating environment for the banking sector.
By staying focused on fiscal consolidation, the government is keeping long-term borrowing costs in check, reducing pressure on financial resources, and freeing up space for the private sector to thrive.
While the economy is expected to moderate to 6.4% growth in FY25 from 8.2% in FY24, the fundamentals remain robust, supported by a strong domestic market and rising working-age population. The projected moderation in inflation to 4.5% in FY26, aided by favourable food prices and softening commodity costs, creates an optimal environment for credit growth. These macroeconomic conditions, combined with the budget’s strategic initiatives, present significant opportunities for the banking sector to drive economic expansion through enhanced credit access and financial inclusion.
Rural credit and financial inclusion
The budget’s emphasis on rural credit expansion through the Kisan Credit Card (KCC) scheme marks a significant step forward. The enhancement of loan limits from Rs 0.3 million to Rs 0.5 million, benefiting 77 million farmers, fishermen, and dairy farmers, represents a substantial opportunity for the banking sector. This move will not only boost agricultural productivity but also expand our rural banking portfolio.
The introduction of the ‘Grameen Credit Score’ framework by Public Sector Banks is particularly noteworthy. This initiative will revolutionize rural credit assessment, enabling banks to better serve Self Help Group members and rural populations. It’s a crucial step toward data-driven rural banking that could significantly reduce credit risk while expanding our rural customer base.
MSME sector reforms and credit enhancement
The budget introduces transformative measures for the MSME sector, which currently constitutes 6.6% of non-food credit, up from 5.3% in March 2020. The revision in MSME classification criteria, with 2.5x enhancement in investment limits and 2x in turnover limits, will allow more businesses to retain their MSME status while scaling operations. The introduction of micro-enterprise credit cards with a Rs 0.5 million limit for Udyam-registered entities, targeting one million cards in the first year, presents a significant business opportunity.
Furthermore, the enhanced credit guarantee cover for MSEs (from Rs 50 million to Rs 100 million) could unlock additional credit flow of approximately Rs 1.5 trillion. This enhancement, coupled with special provisions for well-run exporter MSMEs for term loans up to Rs 200 million, demonstrates the government’s commitment to strengthening this vital sector.
Digital banking and payment systems
The Budget shows continued focus on technological innovation, though with some recalibration. The revamping of PMSVANidhi with UPI-linked credit cards shows the government’s commitment to digitizing small-scale lending. However, the reduction in allocation for incentivizing RuPay debit cards and low-value UPI transactions from Rs 20 billion to Rs 4.37 billion requires banks to reassess their digital payment strategies.
Insurance and investment reforms
The increase in FDI limit for insurance from 74% to 100% represents a significant opportunity for banking institutions with insurance subsidiaries. This could lead to enhanced capital inflow and technological capabilities in the bancassurance space. The clarification on ULIP taxation as capital gains brings much-needed clarity to our wealth management offerings, particularly benefiting high-tax-bracket individuals.
Strategic implications and way forward
For the banking sector, these initiatives require strategic responses across multiple dimensions. First, banks need to strengthen their rural presence and digital infrastructure to effectively implement the enhanced KCC scheme and Grameen Credit Score framework. Second, the expanded credit guarantee scheme necessitates robust risk assessment frameworks while offering opportunities for portfolio growth.
The budget’s emphasis on blended finance, evidenced by initiatives like SWAMIH Fund 2 with its Rs 150 billion allocation, opens new avenues for public-private partnerships in stressed asset resolution. The increased outlay under PMAY 2.0’s interest subsidy scheme (Rs 15 billion for FY25 and Rs 35 billion for FY26) presents opportunities in affordable housing finance.
As we move forward, the success of these initiatives will depend on the banking sector’s ability to leverage technology, strengthen risk management frameworks, and create innovative products that cater to the evolving needs of our diverse customer base. The budget has set the stage for transformative growth in the banking sector, and it’s now up to us to convert these opportunities into sustainable business growth while furthering the national agenda of financial inclusion and economic development. The coming fiscal year presents both challenges and opportunities for the banking sector. By focusing on efficient implementation of these measures while maintaining asset quality and profitability, banks can play a crucial role in achieving the government’s vision of inclusive economic growth.
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