Budget 2025: Govt tries to strike a balance between credit and deposits

The Indian banking and financial sector though robust and well capitalized, still faces serious challenges linked to unsecured loans and global market volatility. This fact has already been highlighted in the Economic Survey 2025. To combat this issue, the FM has introduced several measures for the sector, for example, to bring credit guarantee cover for MSMEs.

Gross non-performing assets (NPAs) in the Indian banking system has touched a 12-year low. It has now reached a value of 2.6%. Still, it is crucial to note, that unsecured personal loans and credit card defaults are becoming key stress points.

As of the month of September 2024, about 51.9% of new retail NPAs have stemmed from slippages in the unsecured loan segment. This is concerning and raises alarms about financial stability.

Gross non-performing assets touch 12-year lows

The Reserve Bank of India (RBI’s) financial stability report of December 2024 reveals that nearly half of personal loan and credit card holders carry the majority of larger secured loans. Home loans and vehicle loans are examples of the kind of loans that these individuals carry. This interlinking of loans increases delinquency risk.

The RBI’s November 2023 move to raise risk weights on unsecured loans by 25 basis points was done to ensure that excessive lending and distribution of loans can be discouraged.

Still, rapid credit growth expansion persists. Majority of these are housing loans. hence, the pressing issue of credit-deposit mismatch remains, where credit growth outpaces deposit accumulation, creating systemic imbalances. Over the last few years a lot of retail money has also flown into the equity markets in the form of SIPs.

Financial sector shows resilience

In spite of these challenging concerns the financial sector shows strength and resilience. Scheduled commercial banks (SCBs) have reported a capital-to-risk-weighted asset ratio (CRAR) of 16.7%, profit after tax (PAT) growth of 22.2% YoY in H1 FY25. There have also been improvements in Return on equity (RoE) and Return on assets (RoA) been observed.

With a credit guarantee for MSMEs and relief for taxpayers in the Union Budget 2025-26 by making income up to ₹12 lakhs tax free, the FM through her budget has tried to provide the much needed relief to the middle class primarily to revive demand and boost sentiment.

Further, factoring in the standard deduction of ₹75,000 for the salaried class, an income up to ₹12.75 lakh will be tax-free. This income, however, excludes capital gains, which are taxed at separate short-term and long-term tax rates.

Expert views on the budget

Mr. Ajay Kumar Srivastava, Managing Director & CEO, Indian Overseas Bank stated that: “The Union Budget of 2025 focused on MSMEs, agriculture, investment and exports has many positive decisions, and we welcome them. The enhancement of the Kisan Credit Card (KCC) loan limit to INR 5 lakh is a huge development which will help farmers improve agricultural productivity.”

He further added that, “Also the increase in the guarantee cover for MSME from INR 5 crore to INR 10 crore and for startups from INR 10 crore to INR 20 crore will foster entrepreneurship, create job opportunities and improve the business environment. The proposal to extend interest free loans to states for 50 years is surely a bold step that will accelerate development of infrastructure and boost economic growth.”

It is now to be seen how the stock markets react on the budget announcements when the market re-opens on Monday after closing about 1% higher on February 1. The benchmark Nifty50 index settled at 23,482 points.