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

The Indian banking and financial sector, though robust and well-capitalised, continues to face serious challenges linked to unsecured loans and global market volatility. These issues were already highlighted in the Economic Survey 2025. To combat these, Finance Minister Nirmala Sitharaman introduced several measures, including a credit guarantee cover for MSMEs.

Gross non-performing assets (NPAs) in the Indian banking system have touched a 12-year low, now standing at 2.6%. However, unsecured personal loans and credit card defaults remain major stress points.

As of September 2024, about 51.9% of new retail NPAs stemmed from slippages in the unsecured loan segment, raising concerns and raising alarms about financial stability.

Stress in retail loan continues 

The Reserve Bank of India’s (RBI) Financial Stability Report for December 2024 revealed that nearly half of personal loan and credit card holders also carry large secured loans, such as home loans and vehicle loans. This interlinking of loans increases delinquency risk.

The RBI’s November 2023 move to raise risk weights on unsecured loans by 25 basis points aimed to discourage excessive lending and the indiscriminate distribution of loans.

Despite this, rapid credit growth persists, primarily in housing loans, exacerbating the pressing issue of credit-deposit mismatch. This occurs when credit growth outpaces deposit accumulation, creating systemic imbalances. In recent years, significant retail money has flowed into the equity markets in the form of SIPs.

Financial sector shows resilience

Despite these challenges, the financial sector has shown strength and resilience. Scheduled commercial banks (SCBs) reported a capital-to-risk-weighted asset ratio (CRAR) of 16.7%, and profit after tax (PAT) growth of 22.2% YoY in H1 FY25. Improvements in Return on Equity (RoE) and Return on Assets (RoA) have also been observed.

With the introduction of a credit guarantee for MSMEs and tax relief for middle-class taxpayers in Union Budget 2025-26—making income up to ₹12 lakhs tax-free—the FM has provided the much-needed stimulus 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, excluding capital gains, which are taxed separately at short-term and long-term tax rates.

Expert views on the budget

Mr Ajay Kumar Srivastava, Managing Director & CEO, Indian Overseas Bank, stated: “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, “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 the development of infrastructure and boost economic growth.”

It is now to be seen how the stock markets react to 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.