Rising stress in unsecured lending, MSMEs: What the financial sector wants in Union Budget 2026

As the Union Budget for FY 2026–27 approaches, India’s financial services sector is seeking targeted policy interventions to address rising credit risks, liquidity pressures in non-banking financial companies (NBFCs), and the need for deeper banking reforms, according to Vivek Ramji Iyer, Partner and Leader – Financial Services at Grant Thornton Bharat.

Iyer said growing stress in unsecured lending and persistent liquidity challenges facing NBFCs have emerged as key areas of concern, with potential spillover risks for the broader financial system if left unaddressed.

Highlighting vulnerabilities in the NBFC segment, he said liquidity constraints remain the most pressing challenge and called for a dedicated policy response in the forthcoming Budget.

“From an NBFC perspective we actually are hoping that we can see some announcement on a special liquidity window for NBFCs because liquidity risk is one of the biggest challenges that the NBFCs face and any amount of unchecked liquidity risk can significantly escalate to a solvency risk for NBFCs,” he said.

Iyer also flagged increasing stress in unsecured lending, particularly in the MSME and microfinance segments, noting that global uncertainty has intensified pressure on borrowers connected to export-orientated sectors.

According to him, policy support will be critical to ensure continued credit flow to sensitive segments without amplifying systemic risk.

“What’s needed from an unsecured lending standpoint is a more balanced asset quality approach,” he said, adding that refinancing support for MSMEs exposed to global uncertainty would be critical.

From a banking sector standpoint, Iyer said the Budget should prioritise reforms that facilitate consolidation and attract private capital, especially within the urban cooperative banking ecosystem.

“Enabling consolidation within the banking segment in terms of reforms around how exactly can urban cooperative banks come together, what can be some of the acquisition M&A easing from urban cooperative banks being taken over by small finance banks or getting converted into small finance banks, could be some of the useful reforms” he said.

On technology and innovation, Iyer said the financial sector is expecting higher Budget allocations towards artificial intelligence and quantum computing, particularly for building public digital infrastructure that can benefit the entire ecosystem.

“Investments and budget outlays in these directions more in terms of creating public goods will help the entire financial services ecosystem,” he said.

He added that the industry is also awaiting clarity on the public cloud infrastructure framework earlier indicated by the Reserve Bank of India.

“Another reform that we are actually hoping to see is the whole public cloud infrastructure that RBI kind of mentioned in one of the monetary policy announcements sometime back,,” he said.

While stressing the importance of innovation, Iyer underlined the need for strong safeguards around consumer protection, financial literacy, and cyber risk management as technology adoption accelerates.

“We expect that the announcement on the AI quantum computing will not be standalone, but it will actually be in conjunction with the push that the regulators will be driving from a whole investor awareness… because consumer interest, consumer protection is a significant focus areas,” he said.

On the taxation front, Iyer said he does not anticipate significant changes to personal income tax slabs or home loan-related deductions, suggesting that the government’s emphasis appears to be on long-term structural reforms rather than short-term fiscal incentives.

Looking ahead, he said the outlook for 2026 appears more stable than 2025, with India’s growth increasingly anchored in domestic investment rather than external demand.

“Easing private capital requirements from an investment in India standpoint will play a significant role,” he said, adding that ease of doing business, regulatory harmonisation and lowering the cost of doing business would be crucial to sustaining economic momentum.