Budget 2026: Why India Needs Smarter Credit, Not a Bigger Financial System

Table of Contents

• Beyond Size: The New Financial Mantra for India
• How Budget 2026 Expectations Are Being Redefined
• The Liquidity Depth Gap: Why It Matters
• Affordable Credit—For Whom, and How?
• The Role of Fintech & Digital Public Infrastructure
• What the Budget Can Actually Do: Policy Levers
• Risks and Challenges Ahead
• Conclusion
• Sources

Beyond Size: The New Financial Mantra for India

For years, India’s financial narrative revolved around scale: more banks, more branches, more ATMs. But as the economy matures, a powerful new consensus is emerging—one that challenges the obsession with size. “India does not need a larger financial system,” argues a growing chorus of economists and bankers. “It needs a system where liquidity is deeper, credit is smarter, and access is truly inclusive” .

This philosophy is now shaping the core of Budget 2026 expectations. With GDP growth stabilizing above 6.5% and digital infrastructure like UPI and ONDC scaling rapidly, the focus is shifting from quantity to quality—from building institutions to enabling outcomes.

How Budget 2026 Expectations Are Being Redefined

Gone are the days when stakeholders demanded massive capital infusions into public sector banks or new mega-schemes. Instead, industry bodies like FICCI and NASSCOM are urging the government to prioritize:

• Deepening credit penetration in Tier-2/3 cities and rural India.
• Reducing cost of capital for MSMEs and low-income households.
• Strengthening last-mile delivery through fintech partnerships.
• Incentivizing responsible lending via risk-sharing mechanisms.

The goal? A financial ecosystem that doesn’t just exist—but actively empowers entrepreneurs, farmers, and gig workers with timely, affordable capital.

The Liquidity Depth Gap: Why It Matters

“Liquidity depth” refers to the ability of a financial system to absorb large transactions without causing price volatility or credit crunches. In India, while urban centers enjoy robust liquidity, vast swathes of the economy remain starved.

Consider this: over 60% of MSMEs still rely on informal lenders charging 24–36% annual interest . Meanwhile, formal bank credit grows at just 12–14%. This gap isn’t due to lack of funds—it’s due to poor risk assessment, high transaction costs, and weak collateral frameworks.

Budget 2026 could bridge this by expanding the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and integrating alternative data (like GST invoices or UPI flows) into credit scoring—a move already piloted by RBI’s Account Aggregator framework.

Affordable Credit—For Whom, and How?

Affordability isn’t just about low interest rates—it’s about relevance. A farmer doesn’t need a 5-year loan; he needs a 90-day crop cycle loan. A street vendor doesn’t need a ₹10 lakh overdraft; she needs a ₹10,000 instant microloan.

Experts suggest the budget should:

1. Subsidize interest rates selectively for priority sectors (e.g., women-led startups, green energy SMEs).
2. Scale the Jan Samarth portal to onboard 10 million new borrowers by 2027.
3. Support NBFCs and small finance banks with refinance windows from NABARD and SIDBI.

These targeted interventions would deliver more impact than blanket rate cuts or universal schemes.

The Role of Fintech & Digital Public Infrastructure

India’s secret weapon is its digital public infrastructure (DPI). UPI processes over 13 billion transactions monthly. Aadhaar enables instant KYC. The Account Aggregator network unlocks cash-flow-based lending.

Budget 2026 must double down on this advantage. Recommendations include:

• Allocating ₹500 crore to build a national **credit registry** for unsecured loans.
• Providing tax incentives for lenders using DPI for underwriting.
• Launching a **“Credit Stack”**—a modular, open-source toolkit for lenders to build inclusive products.

As the World Bank notes, “India’s DPI has the potential to reduce lending costs by 30–40%” . For more on this, see our deep dive on [INTERNAL_LINK:india-digital-public-infrastructure].

What the Budget Can Actually Do: Policy Levers

While monetary policy rests with the RBI, the Union Budget holds key fiscal levers:

• Tax reforms: Rationalize TDS on interest income to encourage small savings mobilization.
• Capital allocation: Infuse equity into regional rural banks (RRBs) focused on agri-credit.
• Regulatory sandboxes: Fund state-level innovation labs for rural fintech pilots.
• Financial literacy: Scale the National Strategy for Financial Education (NSFE) with school-level integration.

These measures cost less than headline-grabbing subsidies but yield long-term systemic gains.

Risks and Challenges Ahead

Smarter credit isn’t without pitfalls. Over-reliance on algorithms could exclude the digitally illiterate. Rapid NBFC expansion may revive asset-liability mismatches. And without strong grievance redressal, digital lending apps could enable predatory practices.

The budget must therefore pair innovation with safeguards—such as a **Digital Lending Code of Conduct** and mandatory grievance officers for all fintechs.

Conclusion

The true measure of Budget 2026 expectations won’t be in headline numbers or fiscal deficits—it will be in how many street vendors get their first formal loan, how many farmers avoid loan sharks, and how many young entrepreneurs turn ideas into businesses without begging for capital. By prioritizing smarter, affordable credit over sheer scale, India can build a financial system that doesn’t just grow—but includes, empowers, and endures.

Sources

[1] Times of India. “Budget 2026 expectations: Next phase of financial growth is affordable, smarter credit”.
[2] Reserve Bank of India. “Report on Trend and Progress of Banking in India 2025”.
[3] World Bank. “India Development Update: Harnessing Digital Public Infrastructure for Financial Inclusion”. https://www.worldbank.org/