Banking Central | Banks may benefit from FM Nirmala Sitharaman’s Budget credit push

Budghet measures to support credit flow to MSMEs and agriculture will help improve credit flow

Finance Minister Nirmala Sitharaman’s Budget speech 2025 was notably silent on banking reforms such as bank privatisation and strengthening the insolvency process improvements.

The absence of the much-anticipated changes in minister’s eighth straight Budget, coupled with higher market borrowing targets, weighed on bank stocks on February 1, with leading lenders trading in the red.

That said, the Budget, which will go down as an "I-T Budget" after the proposed overhaul of the tax regime, does offer some measures that can boost credit and deposit growth.

The expansion of the Credit Guarantee Fund for MSMEs (CGTMSE) and startups could support bank lending. The credit cover for micro and small enterprises has been doubled from Rs 5 crore to Rs 10 crore, potentially unlocking Rs 1.5 lakh crore in credit over the next five years.

For startups, the cap has been raised from Rs 10 crore to Rs 20 crore, with reduced guarantee fees for loans in 27 “focus sectors”.

Sitharaman also revised the MSME classification threshold, based on turnover, from Rs 250 crore to Rs 500 crore, which means more companies can now qualify as MSMEs, improving their access to cheaper bank credit.

Given that MSMEs are major job creators, strengthening this sector could spur significant loan demand.

The sector employs 7.5 crore people, the minister said while presenting the first full-year Budget of Modi 3.0.

Another notable move is the increase in the Kisan Credit Card (KCC) loan limit from Rs 3 lakh to Rs 5 lakh, which is expected to drive agricultural loan growth.

As of March 2024, KCC loans totalled Rs 9.81 lakh crore across 7.75 crore accounts. However, rising farm non-performing assets (NPAs) — already flagged by lenders such as HDFC Bank — are a concern, particularly for public sector banks with significant rural exposure.

Agricultural credit has surged from Rs 13.3 lakh crore to Rs 22.2 lakh crore over the past three years, accounting for 13 percent of the total bank credit. This growth carries risks, as farm loans are vulnerable to seasonal fluctuations and external shocks.

The Budget also highlighted progress under the Special Window for Affordable and Mid-Income Housing (SWAMIH), with 50,000 units completed and another 40,000 expected in 2025.

SWAMIH Fund 2, with a corpus of Rs 15,000 crore contributed by the government, banks, and private investors, aims to facilitate the completion of an additional 1 lakh housing units.

The fund supports distressed real estate projects, acting as a lender of last resort for developers facing financial or legal hurdles.

A 2019 study by PropEquity, commissioned by SBI Ventures, estimated that around 1,500 stalled projects with 4.58 lakh housing units required Rs 55,000 crore for completion.

Lastly, the income-tax rebate for individuals earning up to Rs 12 lakh annually is expected to boost disposable income, likely driving consumption and supporting credit and deposit growth in the process.

Overall, while the Budget provides some tailwinds for the banking sector, especially in segments like MSMEs, agriculture and housing, these areas traditionally carry higher credit risks. The true impact will depend on how additional lending to these sectors performs in terms of asset quality over time.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)