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While the government has estimated an annual revenue loss of about Rs 480 billion, due to the reduced Goods and Services Tax (GST) rates on various products, a recent report by Systematix Research has pegged the figure much higher, at nearly Rs 1.2 trillion.
The report highlighted that lower tax revenues may squeeze the government's capacity for capital expenditure. A slowdown in public infrastructure spending would have a direct bearing on the banking sector by limiting demand for project and infra credit. "A huge revenue loss could constrain government's capital expenditure spend, squeezing the credit demand from the infrastructure sector," the report stated. Indian exporters currently face double tariffs of 25 per cent plus 25 per cent, which could weaken competitiveness and, over time, weigh on the country's trade flows. The report cautions that if exports were to decline meaningfully, the slowdown could trickle down to banks through reduced credit demand. Meanwhile, the report pointed out challenges banks are already facing from interest rate changes. The Reserve Bank of India (RBI) has cut the repo rate by 100 basis points between February and June 2025. With banks required to pass on these changes quickly, their Net Interest Margins (NIMs) have come under pressure. While margins are expected to stabilize by the third quarter of FY26, further rate cuts could lead to another round of stress. Systematix Research also flagged rising concerns in the Micro, Small and Medium Enterprises (MSME) sector. Although banks have not yet experienced fresh stress, cash flow challenges in this segment could eventually impact repayment capacity. The report noted that "any rise in stress in the MSME sector could adversely impact the revenue and profitability of the banking sector." Looking ahead, the transition to an Expected Credit Loss (ECL) framework could further impact banks' bottom lines. At present, lenders follow RBI's existing asset classification rules, but they have begun submitting trial accounts based on ECL. The report underlined that while the RBI has not yet issued a timeline, the eventual rollout of ECL will likely carry some initial costs for banks' profitability. (ANI)
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