As the Union Budget approaches, bankers and non-banking financial company (NBFC) leaders are calling for structural policy support to address mounting pressure on deposits, rising funding costs and the long-standing credit gap faced by micro, small and medium enterprises (MSMEs), even as credit demand in the economy remains strong.
Finance Minister Nirmala Sitharaman will present the Union Budget for 2026-27 on February 1.
Banking Deposit Challenges
For banks, the immediate challenge lies on the liability side. Deposit growth has lagged credit expansion, pushing up deposit rates and squeezing margins. “The banking industry has been facing a lower deposit growth to credit growth leading to a stress in deposit rates and NIM (net interest margin) of the banks,” Alok Singh, head of treasury at CSB Bank, said.
Singh added that the Budget must acknowledge the structural shift of household savings to other financial avenues and respond with targeted incentives.
“An assessment of these changes, where the core deposits of banks are getting routed to other sectors, needs to be undertaken, and suitable tax incentives, along with new product lines to incentivise deposit holders, are required,” he mentioned.
Salee S Nair, managing director and chief executive officer of Tamilnad Mercantile Bank, stressed the need to encourage long-term household savings and improve the transmission of these funds into productive credit.
“The Budget can play a meaningful role by encouraging long-term household savings and ensuring a more efficient transmission of these funds into productive credit, particularly for MSMEs and agri-linked sectors,” he said.
Key Regulatory Recommendations
Among the key recommendations from CSB Bank are tax deductions on incremental term deposits or deposit rollovers, exemption of tax deducted at source (TDS) on bank interest income up to Rs 50,000 for retail customers, and waiver of TDS on non-individual borrowers.
The bank has also sought a long-term repo facility for banks and a reduction in the SARFAESI threshold to Rs 5 lakh for all lenders to strengthen recovery mechanisms.
At present, lenders such as banks, housing finance companies (HFCs) and asset reconstruction companies (ARCs) can invoke the SARFAESI Act, 2002 for loans of Rs 1 lakh and above, while NBFCs are subject to a much higher threshold of Rs 50 lakh.
Nair added that stronger risk-sharing mechanisms and support for formalisation would allow banks to expand lending responsibly “without compromising underwriting standards”.
Lenders are also seeking policy backing for technology adoption in banking.
“The Budget should provide clear policy support for the adoption of digital and AI-led solutions in banking, with a focus on risk management, fraud prevention, compliance and customer service,” Nair said, adding that incentives for investment in digital infrastructure and data security would help banks deploy technology at scale with confidence.
MSME Funding Support
While banks remain focused on deposits and margins, NBFCs lending to MSMEs are looking for structural measures to bridge a persistent credit gap. MSMEs contribute over 30% to GDP and still face a significant and enduring credit shortfall, lenders said.
“The expectation is that the Budget will go beyond short-term stimulus and focus on lowering the cost of capital, improving access to liquidity, and enabling efficient risk-sharing mechanisms, particularly for institutions that finance MSMEs at the last mile,” said Shachindra Nath, founder and managing director of UGRO Capital.
He believes India’s digital public infrastructure and co-lending frameworks can help shift MSME lending “away from collateral dependence towards cash-flow, behaviour and sector-aligned underwriting”, enabling scale while protecting asset quality.
Among the industry’s key demands is the creation of a dedicated NBFC–MSME or NBFC–priority sector lending (PSL) category, along with access to cheaper and more predictable refinance funding, potentially through SIDBI. Nath said such a refinance window would be a critical stabiliser during periods of stress.
“MSME-focused NBFCs are structurally dependent on market borrowings and therefore face funding pressures during liquidity tightening, even when their underlying portfolios remain healthy,” he said.
“A well-designed refinance facility would provide predictable, lower-cost and longer-tenor funding, allowing NBFCs to continue lending through economic cycles,” Nath added, noting that MSME stress is often driven by cash-flow mismatches rather than weak business viability. Such support would help protect jobs, supply chains and local economic activity, he said.
NBFC-microfinance institutions (MFIs) are also closely tracking Budget proposals, viewing a potential mega credit guarantee as a critical support measure amid tight liquidity conditions and rising funding costs. The Microfinance Industry Network (MFIN), an association representing the sector, has proposed a Rs 20,000-crore credit guarantee scheme for MFIs.
Industry executives said a larger, government-backed guarantee could significantly improve banks’ risk appetite towards the sector, lower borrowing costs, and provide much-needed balance sheet comfort, enabling NBFC-MFIs to sustain credit flow to low-income and informal-sector borrowers.
“Once funding normalises, the sector could see growth of around 15–20 per cent in assets under management, given the current economic scenario and underwriting standards,” Alok Misra, chief executive officer and director of MFIN, said.