As the Union Budget approaches, bankers and non-bank financial company leaders are calling for structural policy support to address mounting pressure on deposits, funding costs and the long-standing credit gap faced by MSMEs, even as credit demand in the economy remains strong. The Finance Minister Nirmala Sitharaman will present the Union Budget for 2026-27 on February 1.
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,” said Alok Singh, head of treasury at CSB Bank.
Singh said the Budget must acknowledge this structural shift of housing savings to other financial avenues and respond with targeted incentives.
“An assessment of such changes where the core deposits of banks are getting routed to other sectors needs to be done and suitable tax incentives, along with new product lines which can incentivise deposit holders, are required,” he said.
Bridging the Deposit Gap
Salee S Nair, managing director and CEO 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.
Among the key recommendations from CSB Bank are tax deductions on incremental term deposits or deposit rollovers, exemption of 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 non-banking financial companies (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 also expect 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 investments in digital infrastructure and data security would help banks deploy technology at scale with confidence.
Strengthening MSME Lending
While banks focus on deposits and margins, NBFCs lending to MSMEs are looking for structural measures to close a persistent credit gap. MSMEs contribute over 30% to GDP and still faces a significant and persistent credit gap, lenders said.
“The expectation is that the budget will go beyond short-term stimulus and focus on lowering the cost of capital, improving liquidity access, and enabling efficient risk-sharing mechanisms, particularly for institutions that finance MSMEs at the last mile,” Shachindra Nath, founder and managing director of UGRO Capital said.
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”, supporting scale while protecting asset quality.
Among the industry’s key asks is the creation of a dedicated NBFC–MSME or NBFC–PSL category, along with access to cheaper and more predictable refinance funding, potentially through SIDBI. Nath said 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-MFIs are closely tracking the proposal, viewing the potential mega credit guarantee as a critical support measure amid tight liquidity conditions and rising funding costs. The Microfinance Industry Network, an association for the microfinance sector, had proposed a Rs 20,000 crore credit guarantee scheme for microfinance institutions (MFIs).
Industry executives said a larger, government-backed guarantee could significantly improve banks’ risk appetite toward 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 the funding normalises, hopefully the sector could see a growth of around 15-20% in AUM given the current economic scenario and underwriting standards” Dr Alok Misra, CEO and Director of MFIN said.