GST 2.0 – Implications for Banks & NBFCs

Introduction

The 56th GST Council meeting in September 2025 marked the most significant set of changes since the tax was first rolled out in 2017. The reforms aim to make essentials more affordable, simplify compliance for businesses, and strengthen the legal backbone of GST.

For the financial sector, the implications extend well beyond taxation. At a time when many NBFCs are grappling with rising stress in personal loans and microfinance portfolios, and credit growth is subdued, the new measures could help reset the cycle. Lower costs for households and businesses, faster refunds, and legal clarity all point to a healthier lending environment. Importantly, SBI Research estimates the fiscal impact at only ₹3,700 crore for FY26 — minimal when set against the potential benefits of higher demand and stronger tax compliance.

The question lenders must ask is not whether these changes matter, but how to position themselves to capture the opportunities and manage the risks they create.

Reforms Overview – Three Pillars

The GST Council’s announcements can be viewed under three broad pillars: structural reforms, rate rationalisation, and ease of operations.

1. Structural reforms

These measures strengthen the framework within which businesses operate. Key elements include:

• GST Appellate Tribunal (GSTAT) to become operational by December 2025, providing long-awaited dispute resolution.

• Risk-based refunds that will release 90% provisionally for exporters and inverted duty claims.

• Simplified GST registration, with automated approval within three days for low-risk entities such as small e-commerce sellers.

• Revised place-of-supply rules, making India more competitive for service exports.

2. Rate rationalisation

The rate changes reflect a balancing act, aiming for relief for households and MSMEs.

• Cuts were applied to essentials such as milk, paneer, butter, soaps, and toothpaste.

• Socially important categories like medicines and school supplies were brought down to 5% or exempted altogether.

• Sectoral relief came through lower taxes on cement, textiles, renewable energy equipment, and electronics.

• Increases targeted sin and luxury items including pan masala, tobacco, luxury cars, yachts, and personal aircraft.

3. Ease of operations

By simplifying rules, the Council aimed to reduce friction in daily business.

• Post-sale discount treatment has been clarified, reducing disputes between manufacturers and distributors.

• Refund processes have been streamlined, easing cashflow pressures.

• Valuation rules for sectors like restaurants and lotteries have been clarified.

Table: GST Rate Rationalisations Snapshot

Lending Impacts – The Dual Dimensions

The GST reforms create two major impacts for lenders: credit boost and credit quality improvement.

1. Credit Boost (Loan Demand)

• Consumers: Cheaper durables, electronics, autos, and housing materials will lift demand for personal loans, home loans, and two-wheeler or car finance.

• MSMEs: Input tax relief and faster refunds ease liquidity pressures, raising appetite for working capital and growth loans.

• Dealers & Distributors: Anticipating higher consumer sales, they will stock up ahead of the festive season, driving demand for short-term working capital, supply chain finance, and bill discounting. Caveat: Over-stocking risk if demand underperforms.

• Agriculture: Reduced tax on tractors and equipment will increase credit demand in rural markets.

Industry experts expect a 5–20% rise in credit transaction volumes during the festive season as well as up to 30% higher e-commerce spends. An estimated 8-10% growth in rural consumption in the next two quarters is also expected.

2. Credit Quality Improvement (Repayment Capacity)

• Consumers: Lower GST on essentials reduces household expenditure, freeing up income for EMIs. GST exemption on life and health insurance reduces vulnerability to shocks.

• Businesses: Stronger sales at the consumer end, combined with refund acceleration and fewer disputes, improve cashflows and repayment ability.

• Systemic stability: GSTAT and simpler rules create predictability, lowering NPA risks from compliance disruptions.

Together, these drivers set the stage for a more balanced credit environment and the tailwinds for the next credit cycle.

The Credit Flywheel Effect

The most important outcome for lenders may be the creation of a self-reinforcing cycle:

1. Lower GST makes goods cheaper.

2. Consumers increase demand.

3. Dealers and distributors stock more inventory.

4. MSMEs expand production.

5. Higher sales boost revenues.

6. Consumers and businesses repay loans more smoothly.

7. Lenders gain confidence to lend more (driving both the demand and supply further)

   
   

Figure: Credit Growth Flywheel

This “credit flywheel” has the potential to sustain itself for 12–18 months if demand holds. The caveat is that if consumption underperforms, excess stocking could turn into stressed credit. Lenders will need to balance growth with prudent monitoring.

Takeaways for Lenders

The GST reforms set the stage for new opportunities across major lending segments:

• Consumer Credit: Demand for housing, autos, and durables will rise with affordability.

• MSME & Dealer Finance: Liquidity improvements and festive stocking will drive the need for working capital and supply chain credit.

• Agriculture: Lower costs on tractors and equipment open room for growth in agri-finance.

OneFin can be the perfect partner for a lender at this critical juncture, stepping in to provide the right infrastructure and toolkit for scaling.

• Its modular, low-code platform allows rapid rollout of new products tailored to evolving demand.

• Proven scalability with over 16 lakh loans and 100 million API calls annually. This ensures readiness for seasonal or policy-driven surges.

• Integrated origination, management, and collections systems help embed risk discipline into expansion.

Conclusion

GST 2.0 combines two powerful outcomes: higher credit demand and improved repayment capacity. For banks and NBFCs, this creates the conditions for a lending revival, just as the sector faces pressure from personal loan and MFI stress.

If managed prudently, these reforms can create a lending flywheel that fuels growth while reducing systemic risk. For lenders, the task is to prepare product portfolios and risk frameworks to capture this momentum responsibly.

With its configurable, API-driven infrastructure, OneFin helps institutions act quickly, scale securely, and manage risk, turning a policy shift into a strategic advantage for sustainable lending growth. To know more, schedule a Demo here.