While the central government offered income tax relief and rationalised the GST rates, the Reserve Bank of India reduced the repo rate by a cumulative 125 basis points between February and December and materially eased liquidity conditions.
To be sure, there hasn’t been a surge in bank credit growth, which till October this fiscal averaged 6.3% year-to-date, largely driven by the retail sector. For the full fiscal, we expect the number to be 11-12%—apace with last fiscal.
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Ditto non-banking financial companies/housing finance companies (NBFCs/HFCs). Their credit growth is expected to be 18-19% this fiscal against 18% last fiscal.
Sluggish deposit mobilisation and private sector investments remain spots of bother.
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Given the mission of creating Atmanirbhar India, catalysing private sector investments is crucial for the next legs of growth. The government has done the heavy lifting on capital investments over the past decade to create an architecture that can improve India’s potential growth rate.
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The refrain in the banking and financial industry circles is that the momentum in credit growth and private investments can be bolstered through measures in the Union Budget for next fiscal, such as:
Facilitating an increase in the flow of deposits to, and capital mobilisation of, financial institutions: The deposit composition of banks has seen two key structural shifts: A decline in household contribution to term deposits and a lower current account and savings account (CASA) ratio. The share of household deposits in bank deposits declined from 64% to 60% between fiscal 2020 and 2025, while that of non-financial corporations rose 4%. During periods of tight liquidity, the shift can have implications on deposit stability as corporate depositors tend to be more rate sensitive and prefer shorter tenures, leading to faster deposit outflows and increased funding cost for some banks. To help financial institutions, stakeholders have highlighted some challenges and offered suggestions:
1. Unlocking FDI limit: Public sector banks (PSBs) face capital constraints due to the foreign direct investment (FDI) limit of 20%, which is disproportionately lower than the 74% for private sector banks. Increasing the FDI limit for PSBs can unlock long-term sustainable capital, reducing their reliance on qualified institutional placements.
2. Tax parity: The long-term capital gains on corporate bonds, held for over 12 months, is taxed at 12.5%, whereas interest income on bank fixed deposits (FDs) is taxed at the individual’s income tax slab rate. The high tax discourages investors looking for higher returns from investing in FDs. Bringing parity in tax treatment of these instruments will help the financial institutions.
3. Deposit holding period: To increase stable term deposit funding for banks, the government can consider reducing the holding period for tax exemption which currently stands at five years.
4. Section 80TTA limit: Raising it from Rs 10,000 for interest-free income can help banks attract more low-cost deposits.
5. Section 80TTB: Senior citizens are entitled under this to a tax deduction of up to Rs 50,000 on interest earned from deposits with banks, cooperative banks and post offices. However, this exemption does not apply to deposits with NBFCs. Bringing deposits parked with NBFCs under the purview of the section can help support liquidity in the sector as banks remain prudent in extending credit to NBFCs.
Enhancing credit flow to MSMEs: To fuel economic growth, particularly in the manufacturing sector, it is imperative to unlock the potential of the micro, small, and medium enterprises (MSMEs) by ensuring they have access to sufficient funding. Financial institutions have sharpened their MSME strategies by providing digital underwriting, reducing loan processing turnaround time and building customised products based on the nature of business. Stakeholders say the government should:
1. Raise the priority sector lending (PSL) limits for banks to on-lend to NBFCs, allowing MSMEs to access funds at a lower cost. Currently, banks are allowed to on-lend only up to 5% of their average PSL achievement over the previous four quarters.
2. Shorten recovery time by reducing the Rs 20 lakh threshold for NBFCs to invoke the SARFAESI Act.
3. Implement government guaranteed schemes with minimal documentation for providing working capital assistance for MSMEs.
4. Introduction of subsidies or interest subventions schemes for MSMEs upgrading to greener technologies.
Resolving operational challenges in co-lending: Section 194A of the Income Tax Act mandates a 10% Tax Deducted at Source (TDS) on interest paid to NBFCs by borrowers who are subject to audit, while interest paid to banks is exempt. This differential treatment creates an operational bottleneck in co-lending arrangements, where a bank and an NBFC jointly provide a loan, and the borrower repays through a single EMI at a blended interest rate. For the borrower, it is difficult to bifurcate the interest component of the single EMI to accurately calculate and deduct TDS solely on the portion attributable to the NBFC. Harmonising this requirement would ease the compliance burden for both borrowers and lenders.
Offering credit guarantee scheme for the microfinance sector: The microfinance sector has faced considerable asset-quality challenges due to over-leveraging of underlying borrower wherein multiple lenders extended loans to a single borrower. This has impacted borrowers’ ability to repay the debt, leading to significant write-offs and elevated delinquencies for NBFC-MFIs, consequently impacting the availability of funding from banks, especially for small players. As the microfinance sector moves towards a more responsible lending practices with lower borrower leverage, a government guarantee program for financial institutions lending to NBFC-MFI could help alleviate the liquidity issue.
Increasing reporting transparency and guidelines for fintech: The fintech lending space has grown rapidly with the entry of new players. Therefore, it is essential to establish comprehensive regulatory guidelines for fintechs that focusses on lending practices and reporting transparency.
(Aniket Dani is Director, Crisil Intelligence)