As the clock ticks down to Finance Minister Nirmala Sitharaman’s big moment in Parliament, all eyes are on the financial services sector. The stakes couldn’t be higher. With rising non-performing assets (NPAs) in unsecured loans and a persistent credit gap for small businesses, the industry is looking to Budget 2026 for more than just fiscal numbers—it’s seeking a strategic roadmap for stability and growth.
The core of their ask? A blend of targeted policy support, regulatory relief, and smart incentives to unlock capital for the engine of the Indian economy: the MSME sector. This isn’t just about bank balance sheets; it’s about jobs, innovation, and inclusive economic resilience. Let’s break down the top Budget 2026 banking expectations that could shape India’s financial future.
Table of Contents
- The NPA Nightmare: Why Unsecured Loans Are a Ticking Bomb
- Bridging the MSME Credit Gap: Guarantees and Co-Lending
- Supercharging Digital Financial Inclusion
- Boosting Pension and Insurance Adoption
- Relief for the Lifeline: Rural and Regional Banks
- Conclusion: A Budget for a Resilient Financial System
- Sources
The NPA Nightmare: Why Unsecured Loans Are a Ticking Bomb
The biggest shadow looming over the banking sector is the rapid rise in NPAs, particularly in the unsecured retail segment—think personal loans and credit cards. Data from the Reserve Bank of India’s Financial Stability Report reveals a growing concern, with the gross NPA ratio for unsecured retail loans climbing to 1.8% as of March 2025, significantly higher than the overall retail portfolio .
Experts warn this trend could accelerate, with some projections suggesting NPAs could increase by up to 25% in FY26 due to underlying economic strains and the lagged impact of previous lending booms . This isn’t just a problem for private banks; it threatens the entire credit ecosystem by making lenders more risk-averse, which in turn starves genuine borrowers of capital.
The industry is hoping the budget will address this by encouraging better risk-sharing mechanisms and perhaps even supporting frameworks for faster resolution of stressed assets, ensuring that the current NPA spike doesn’t morph into a full-blown crisis.
Bridging the MSME Credit Gap: Guarantees and Co-Lending
If there’s one universal demand from the BFSI sector, it’s robust support for Micro, Small, and Medium Enterprises (MSMEs). These businesses are the backbone of the Indian economy, yet they remain chronically underfunded. The primary tool they’re asking for is an enhancement of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
Industry leaders are pushing for the government to raise the guarantee cover from the current 75-80% to a much more reassuring 90% for loans up to Rs 5 crore . This simple move could dramatically de-risk lending for banks and NBFCs, encouraging them to extend more credit without demanding excessive collateral—a major barrier for new and small entrepreneurs.
Furthermore, there’s a strong push to deepen and expand co-lending schemes. In these models, banks partner with NBFCs or microfinance institutions, with the government potentially stepping in to share a portion of the risk . This leverages the reach of smaller lenders while providing the capital strength of large banks, creating a powerful channel to get funds directly to the grassroots level where they’re needed most .
Supercharging Digital Financial Inclusion
India has already made giant leaps in digital finance, thanks to the JAM Trinity (Jan Dhan, Aadhaar, Mobile) and the UPI revolution . However, the journey isn’t complete. The financial sector expects Budget 2026 to double down on these efforts, particularly in reaching the last mile—rural women, informal workers, and other marginalized groups who still operate largely outside the formal banking system .
Continued support for initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY) and the expansion of digital payment infrastructure in remote areas are seen as crucial. The goal is to move beyond mere account ownership to active usage, ensuring that every citizen can access credit, savings, and insurance products through their mobile phones . This isn’t just social good; it’s a massive, untapped market for the financial sector.
Boosting Pension and Insurance Adoption
A financially secure population is a stable one. Yet, India faces a massive pension and insurance protection gap. To tackle this, the industry is seeking smart, targeted incentives in the budget. Proposals include enhanced tax breaks for health and term insurance to encourage early and wider coverage .
For pensions, there’s a call to make the National Pension System (NPS) more attractive, possibly by re-introducing tax incentives for the self-employed or offering matching government contributions for low-income subscribers . The idea is to channel long-term household savings into productive, long-duration investments that also provide for citizens’ golden years . Strengthening these safety nets is essential for building a resilient middle class and reducing the burden on public welfare systems in the future .
Relief for the Lifeline: Rural and Regional Banks
Regional Rural Banks (RRBs) are the unsung heroes of financial inclusion, operating in the remotest corners of the country. However, they often face unique challenges, including capital constraints and the impact of natural calamities on their loan portfolios .
The sector is seeking specific regulatory relief for rural banks in the budget. This could include dedicated recapitalization funds, relaxed provisioning norms for loans in distressed agricultural areas, or streamlined compliance requirements that acknowledge their distinct operational environment . Ensuring the health of RRBs is not just a rural issue; it’s fundamental to the success of any national financial inclusion strategy, as they are regulated by the RBI and supervised by NABARD to serve the agrarian economy .
Conclusion: A Budget for a Resilient Financial System
The Budget 2026 banking expectations paint a clear picture: the sector is at a crossroads. It needs a budget that acts as a catalyst, not just a statement of accounts. By addressing the NPA challenge head-on, supercharging credit flow to MSMEs, deepening digital inclusion, strengthening social security nets, and supporting rural lenders, the government can build a more robust, inclusive, and future-ready financial system. The success of this budget won’t just be measured in rupees and paise, but in the millions of small businesses that thrive and the families that gain financial security because of it. For more on how policy shapes markets, see our deep dive on [INTERNAL_LINK:indian-economic-policy].
Sources
- Web Search Result on raising CGTMSE guarantee cover.
- Web Search Result on NBFCs seeking credit guarantee schemes.
- Web Search Result on expanding co-lending schemes.
- Web Search Result on NPA increase projection.
- Web Search Result on unsecured loan NPA ratio.
- Web Search Result on digital financial inclusion for rural women.
- Web Search Result on JAM Trinity and UPI.
- Web Search Result on India’s financial inclusion progress.
- Web Search Result on insurance tax incentives.
- Web Search Result on tax relief on annuities.
- Web Search Result on Budget 2026 for insurance & pensions.
- Web Search Result on making NPS more lucrative.
- Web Search Result on RRBs and Debt Relief Schemes.
- Web Search Result on RRB regulation.
- Web Search Result on government support for RRBs.