Digital initiative, financial inclusion and MSME troika takes centre stage for Budget 2024

DFM takes centre stage in this year's Budget.

By Gurpreet Chhatwal

The Union Budget for full fiscal 2025 strongly emphasises the critical role the financial sector needs to play in supporting economic growth through a series of welcome announcements. These will arm the lenders in increasing credit flow to the crucial sectors of the economy and optimise outcomes in 3 critical areas — credit expansion, financial inclusion and stressed assets resolution.

And the tools used are referred to as the DFM troika, i.e., digital or tech-enabled initiatives, financial inclusion, and MSME (micro, small and medium enterprise) support measures.

Digital Initiatives

First, technology initiatives in agriculture through successful implementation of the Digital Public Infrastructure (DPI) can expand lending to this segment, supported by strengthened underwriting and monitoring to control the traditionally high non-performing assets in the sector.

Technology is also expected to contribute to strengthening the recovery ecosystem, with an integrated technology platform to improve implementation of the Insolvency and Bankruptcy Code. This, coupled with other proposed changes, such as strengthening of the tribunal and appellate tribunal, can improve its efficacy from the perspective of both enhancing recovery levels and speeding up the resolution process.

Financial Inclusion

Two, from an inclusion perspective, the government’s thrust on supporting affordable housing continues with a planned central assistance of Rs 2.2 lakh crore in the next five years.

Together with the proposed interest subsidy, this will support growth for companies offering affordable-housing finance. These companies, on the back of a favourable regulatory dispensation and solid underlying demand, have been growing faster than traditional housing finance companies.

Further, the proposed 3% interest subvention on education loans to youth currently not eligible for Government benefits should lead to robust growth in the segment. Several other steps focused on women and youth have also been announced.

Boost to MSME Sector

Third, and perhaps the most overarching thrust, has been on the MSME front — a number of measures have been proposed to support credit flow to this sector, such as introduction of a credit guarantee scheme for facilitating term loans to MSMEs for purchase of machinery and equipment without collateral or third-party guarantee, solidifying credit assessment criteria of MSMEs by public sector banks and providing guarantee from a government-promoted fund to ensure flow of credit to this sector even during stress periods.

Further, the role of SIDBI has been enhanced from its hitherto primarily refinance focus to expanding direct lending to MSMEs in addition to raising the limit of MUDRA loans.

Also, for facilitating MSMEs to unlock their working capital by converting their trade receivables into cash, the turnover threshold of buyers for mandatory onboarding on the TReDS platform has been reduced.

To be sure, today the Indian financial sector is in sound health with strong profitability and comfortable capital buffers. The banking system’s provisioning cover and net non-performing assets are also at their all-time best levels.

The measures announced in the Budget are expected to bolster the efforts of the financial sector in supporting overall economic growth by expanding the addressable credit base across various borrower segments, while at the same time supporting lenders’ asset quality.

All said, the criticality of the financial sector in achieving the government’s objectives of growth and development is clearly reinforced by the plan for a financial sector vision and strategy document.

While the final contours are awaited, this budget is expected to set the agenda for the next five years and provide a framework to guide the efforts of the government, regulators, financial institutions and market participants.

Gurpreet Chhatwal is Managing Director, CRISIL Ratings Ltd. 

Views are personal and do not represent the stand of this publication.