Banks sense an opportunity in GST gain for retail, MSME

Mumbai: The latest reforms in goods and services tax are expected to unlock fresh credit demand, particularly in the retail and micro, small and medium enterprises (MSME) segments. Bankers say demand will likely be driven by increased consumption activity, working capital needs and private capital expenditure.

The revamp that India announced in the GST framework last week, including a cut in tax rates, coupled with this year's good monsoon season and improving liquidity, is viewed as a timely, positive development that could significantly lift rural sentiment and consumption, bankers said.

"For MSMEs, these reforms ease input costs, simplify compliance and reduce working capital pressures, which can potentially unlock fresh credit demand, especially among first-time and small borrowers," said Manish Kothari, group president and head of Commercial Banking at Kotak Mahindra Bank. "This presents a meaningful business opportunity for banks, particularly in semi-urban and rural clusters." Stable agricultural incomes, supported by lower indirect taxes, are likely to improve grassroots cash flows, driving discretionary spending and creating local demand for MSMEs, he said.

Lower GST on consumer goods, durables, autos and housing-related items is expected to make them more affordable, spurring demand for financing. Consumption-led sectors, including banking and financial services, are already gaining traction amid expectations of increased retail lending.

The GST shift is particularly beneficial for consumption, with the tax now scrapped or moved to the lowest rate of 5% for many categories, said Anshul Chandak, head - Treasury at RBL Bank. "With a boost for consumption, these measures should revive credit growth both in the working capital segment and eventually translate into capacity building and private capex."

Retaining the 5% GST rate across several sectors ensures they continue to benefit from input tax credit, while easing of administrative hurdles under GST will further support MSMEs, he said.

"GST 2.0 rate cuts are likely to give a strong push to credit growth, especially in retail lending areas like auto loans, home loans, and consumer durables," Choice Institutional Equities analyst Vikrant Shah. "With goods becoming more affordable and demand expected to pick up, banks and NBFCs, particularly vehicle financiers, are well-placed to benefit through higher loan disbursements, stronger balance sheets and steady earnings growth," he said.

Bankers are also betting on a festive-season boost, aided by the first phase of the staged cash reserve ratio (CRR) reduction that came into effect last week. This is expected to inject about ₹62,000 crore into the banking system.

"With the recent CRR release injecting surplus liquidity into the system, we are seeing promising avenues for deployment," Kothari said. "While the borrower selection remains critical, formalisation and digital adoption have improved creditworthiness across many MSME segments."

Beyond MSMEs and retail, bankers are also looking at agriculture, consumption, renewable energy and defence as positive credit avenues. "The farm sector has been a positive trend, and slowing urban consumption should now see an upturn," Chandak said. "Larger sectors like renewable energy and defence also show promise."