Union Budget 2024: Focus on Digital Initiatives, Financial Inclusion, and MSME Growth

The Union Budget for the fiscal year 2025 places a strong emphasis on the financial sector's vital role in fostering economic growth. This is achieved through several strategic announcements designed to enhance credit flow to key sectors and optimize outcomes in three critical areas: credit expansion, financial inclusion, and stressed assets resolution.

The DFM Troika: Digital, Financial Inclusion, and MSME Support Measures

Digital Initiatives

First, the budget underscores technology initiatives in agriculture, particularly through the effective implementation of the Digital Public Infrastructure (DPI). This is expected to enhance lending to the agricultural sector, supported by improved underwriting and monitoring to manage traditionally high non-performing assets (NPAs).

Additionally, technology is set to strengthen the recovery ecosystem. An integrated technology platform is proposed to improve the implementation of the Insolvency and Bankruptcy Code (IBC). Along with other proposed changes, such as bolstering the tribunal and appellate tribunal, this initiative aims to enhance recovery levels and expedite the resolution process.

Financial Inclusion

Second, the budget emphasizes financial inclusion with continued support for affordable housing. The government plans to provide central assistance of ₹2.2 lakh crore over the next five years. Combined with the proposed interest subsidy, this will boost growth for companies involved in affordable housing finance, which have been expanding faster than traditional housing finance companies due to favorable regulatory conditions and strong underlying demand.

Additionally, a proposed 3% interest subvention on education loans for youth currently not eligible for government benefits is expected to drive significant growth in this segment. Several other initiatives focusing on women and youth have also been announced.

Boost to the MSME Sector

Third, there is a strong focus on the MSME sector. The budget proposes several measures to support credit flow to MSMEs, including the introduction of a credit guarantee scheme for term loans for machinery and equipment purchases without collateral or third-party guarantees. This is complemented by improved credit assessment criteria for MSMEs by public sector banks and government-promoted fund guarantees to ensure credit flow during stress periods.

The role of the Small Industries Development Bank of India (SIDBI) has been expanded from primarily refinancing to include direct lending to MSMEs, and the limit for MUDRA loans has been raised. Additionally, to help MSMEs unlock working capital, the turnover threshold for mandatory onboarding on the TReDS platform has been reduced.

Overall Impact and Future Vision

Currently, the Indian financial sector is in robust health, characterized by strong profitability and comfortable capital buffers. The banking system's provisioning cover and net NPAs are at their best levels ever. The measures announced in the budget are expected to further bolster the financial sector's efforts to support overall economic growth by expanding the addressable credit base across various borrower segments while maintaining lenders' asset quality.

Financial Sector Vision and Strategy

The critical role of the financial sector in achieving the government's growth and development objectives is reinforced by the announcement of a financial sector vision and strategy document. While the final details are awaited, this budget sets the agenda for the next five years and provides a framework to guide the efforts of the government, regulators, financial institutions, and market participants.

Also read Market Reactions: Analyzing Post Union Budget 2024