The ‘interim’ Budget shows the contours of the upcoming ‘final’ Budget in July. However, this is based on three important assumptions: (a) continuation of the BJP government at the Centre, which is most likely; (b) return of Nirmala Sitharaman as the finance minister, likely with 95-100 per cent confidence interval; and (c) geopolitical tensions de-escalating.

As for the interim Budget and the banking sector, there were no direct measures. Yet, several other measures indicate how the banking sector should shape up to meet the emerging demand for funds from the real sector. Paragraph 39 of the FM’s Budget Speech reflects this: “For meeting the investment needs our Government will prepare the financial sector in terms of size, capacity, skills and regulatory framework.”

Capex and banking structure

Riding on the tripling of the capital outlay on ‘comprehensive’ infrastructure development in the last four years, the capital outlay for 2024-25 has been raised by 11.1 per cent to ₹11.11-lakh crore, accounting for 3.4 per cent of the GDP. This, along with lower market borrowings by the government in 2024-25, is expected to generate substantial private investment demand for bank credit. Besides, this will invigorate the downstream activities in the MSME sector. As such, the interim Budget continues to be pro-MSME. The economy is, basically, poised for an investment-led growth trajectory, instead of consumption-led growth in the last few years. This implies that the country should have a greater number of large banks which can address the emerging demand for massive project finance. Perhaps, one may have to revisit the still-relevant banking structure proposed by the Narasimham Committee – I Report (1991) (pp.68-69).

Precisely, India needs a few large banks which should also be of international nature, a few national banks and a few regional banks. To continue the emphasis on rural banking, one may perhaps explore merging all regional rural banks and rural branches of banks and create a special and dedicated entity. FY25 may witness some structural churning in the banking sector. In order to cater to the likely upsurge in credit demand banks will be required to mobilise low-cost deposits on a larger scale and, at the same time, to eschew asset-liability mismatches, banks should emphasise on term deposits of longer tenors. Perhaps the time has come to amend the Banking Regulation Act, 1949 to allow banks to mobilise deposits for over 10 years. To test the waters, RBI may allow the large banks to do this.

Tourism, as a growth driver, occupies the pride of place in the interim Budget. This unfolds new business opportunities for banks. They have to open branches at emerging and expanding tourist spots and provide foreign exchange facilities at select tourist centres like Ayodhya which is projected to witness large influx of foreign tourists. This will help banks garner foreign exchange. In addition, tourism will boost card business of banks.

Meaningful empowerment of women necessitates that they should be financially independent. At March-end 2023, women depositors and borrowers accounts constituted 38 per cent and 33 per cent, respectively, of the corresponding numbers of total individual accounts. Even in the total PMJDY beneficiaries, women constituted 55 per cent (January 24, 2024). Banks, especially the private ones, need to bolster their efforts to increase financial inclusion among women, aided by the ubiquitous mobile technology.

Education loans

One of the mantras of the interim Budget is to “combine the powers of our youth and technology.” (Paragraph 59) This would necessitate, for example, not only ‘ITI-trained’ but also ‘IIT-educated’ youths. Banks will have to revisit their education loan policies and procedures, particularly the secured ones, keeping in view the increased cost of technical education and year-on-year depreciation in the INR-USD exchange rate. There’s less recovery problems with the secured education loans than the unsecured ones, i.e.,education loans up to ₹4 lakh (₹7.5 lakh under the Credit Guarantee Fund Scheme for Education Loans).

Finally, as the country moves towards a lower interest rate regime, banks should learn to live with lower net interest income (‘spread’) because they have to deploy credit and mobilise deposits at competitive rates on one hand and tackle the accelerating financial disintermediation on the other.

Das is a former senior economist, SBI. Views are personal