Union Budget 2026: How the Budget Impacts Banking and Financial Services 

Each year, government budgets play a crucial role in shaping a country’s financial system. They influence how money moves through the economy, how resources are allocated, and how banks, non-bank financial companies, insurers, and other financial service providers operate. The Union Budget 2026 is expected to set the direction for spending, credit flow, taxation, and regulatory priorities, impacting both traditional banking and emerging financial technologies. 

In recent years, budget decisions have clearly influenced credit growth, asset quality, financial inclusion, digital finance, and regulatory frameworks. The Union Budget 2026 could continue these trends while offering new incentives for innovation and digital transformation in financial services 

Budget Allocations Influence Credit Flow Patterns 

A budget clearly affects how much credit moves through the economy. Credit flow means the money that banks and financial institutions lend to businesses and people. Reserve Bank of India (RBI) data shows that by the end of December 2025, credit to India’s commercial sector grew by about 15% year-on-year, reaching nearly ₹298 lakh crore. This increase came from both banks and non-bank financial institutions, showing that financial flows responded to supportive government policies. 

With the Union Budget 2026, sectors such as infrastructure, green energy, and MSMEs may see focused allocations, likely boosting demand for loans. Increased government spending on these sectors encourages banks to expand loan portfolios, supporting economic growth while diversifying credit risk. 

Fiscal Policy and Government Borrowing Shape Bank Liquidity 

The budget also decides how much the government needs to borrow from the financial system. The fiscal deficit is the difference between what the government earns and what it spends. If the deficit is large, the government borrows more from the market, which can impact banks and other financial service providers. 

Recently, India’s government aimed to lower the fiscal deficit to about 4.4% of GDP for the year ending March 2026, which is much less than during the pandemic. When the government borrows less, banks and other lenders have more money to lend to businesses and consumers, helping credit grow across the economy. 

On the other hand, when the government borrows a lot, it can use up savings from banks and investors by selling government bonds. While government bonds are safe investments, high borrowing can make it harder for banks to lend to other sectors if this demand stays high. The Union Budget 2026 could include measures to balance government borrowing with private sector credit needs 

Asset Quality Changes Through Budget Policy Measures 

A bank’s asset quality is a key indicator of its financial health, with non-performing assets (NPAs) arising when borrowers fail to repay loans on time. Recent budgets have provided tools to help banks manage NPAs more effectively. Banks can now set aside larger provisions for stressed loans, and interest income on NPAs is taxed only when actually received, reducing immediate tax burdens and giving banks greater flexibility in managing finances 

The budget also classified securitized receivables as securities, which helps banks set up a secondary market for troubled assets. This makes it easier for banks to trade and resolve NPAs using the market instead of long recovery processes. 

The Union Budget may introduce further incentives to securitize distressed assets or promote secondary markets for NPAs, enhancing liquidity and operational flexibility for banks. 

Government Budget Decisions Shape Financial Inclusion Gains 

Budgets have played a significant role in improving access to financial services, particularly in rural and underserved areas. Initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY) have enabled millions to open basic bank accounts and join the formal financial system. Government programs supporting financial inclusion have steadily improved access to credit, insurance, and pensions, reflected in India’s Financial Inclusion Index (FI-Index) reaching approximately 67.0 by March 2025.  

Budgets have also strengthened rural credit and digital services by raising Kisan Credit Card limits, enhancing the PM SVANidhi scheme for street vendors, and providing loans for micro, small, and medium businesses, making formal financing more accessible to traditionally underserved groups. 

The Union Budget 2026 could further strengthen digital financial services, rural credit, and microenterprise lending, helping underserved populations access banking while reducing operational costs for institutions. 

Tax Policies Affect Banking and Financial Operations 

Tax rules in the budget affect both banks and their customers. Budgets rarely raise taxes directly on banks, but changes to corporate tax, interest taxes, and capital gains can influence profits and investment choices. 

The Union Budget also includes changes to corporate tax and dividend tax policies, as well as steps to support working with fintech companies. In past budgets, these changes affected how financial institutions invest and work with technology firms. Banks review these tax changes to see how they affect returns, capital use, and business decisions, since taxes directly shape profits and long-term plans. 

Regulatory Environment and Budget Driven Reforms 

Budgets often set the stage for new regulations that affect how financial institutions work. In recent years, finance ministries have used budgets to bring in reforms for better risk management, cybersecurity, and efficiency. 

Recent budgets have focused on stronger rules for digital banking, better risk management, and faster ways to resolve troubled assets. These changes help banks and financial firms improve their governance and become more resilient. 

Budget funds have also supported upgrades to cybersecurity infrastructure, which is important as digital banking and payments grow quickly. As more customers use online transactions, keeping digital platforms safe is a top priority. 

System-Level Digital and Deregulatory Reforms in Financial Services 

Recent budgets have also brought in bigger reforms that change how financial services work. These include steps like deregulation, incentives for working with fintech, higher foreign investment limits in insurance, and digital trade documentation to make things smoother and more efficient. 

Changes like the updated Central KYC Registry help banks and fintech firms cut down on repeated compliance work and lower costs. These steps also improve governance, make things more transparent, and support digital services, showing a move toward a more efficient and competitive financial system. 

Digital and Fintech Expansion Through Budget Priorities 

Recent budgets have put more focus on digital financial transformation. Government spending has supported expanding digital payment networks, working with fintech platforms, and building real-time payment systems. 

The fast growth of digital finance has changed how people pay and brought more users into formal financial services. Public policy has supported digital tools like UPI-linked credit and digital loans for groups that had less access before. 

Better digital infrastructure has helped banks and financial institutions lower costs, reach more customers, and deliver services more efficiently, especially in remote or semi-urban areas. 

The Union Budget 2026 is expected to strengthen India’s digital finance and fintech ecosystem, expanding UPI and Digital Public Infrastructure. Streamlined digital KYC and account aggregator integration may enable cash flow based lending, improving access to formal credit and lowering barriers for individuals and small businesses. 

Agricultural Credit Policies and Banking Risk 

Budgets have regularly pushed banks to lend more to agriculture by setting priority sector rules and offering interest support. These policies made it easier for farmers to get loans and helped banks grow in rural areas, including through digital loans in remote places. However, lending to agriculture also brings risks from weather, price changes, and uncertain repayments. Past experience shows banks need careful credit checks and risk controls to keep their loan portfolios stable. 

Discussions ahead of the Union Budget 2026 emphasise increasing credit accessibility and potentially revising lending limits to ensure farmers receive affordable financing. At the same time, policymakers are likely to remain conscious of the inherent risks tied to agriculture, such as weather variability and income volatility, underscoring the importance of robust risk assessment and monitoring frameworks for banks. 

MSME Credit Support and Lending Discipline 

MSMEs are a key focus for Union Budgets, given their importance to GDP, employment, and exports. Recent budgets have helped MSMEs get financing through credit guarantee schemes and targeted funds for formalization and technology upgrades.  

These steps made it easier for small businesses without much collateral to get bank loans. For banks, lending to MSMEs increased the number of borrowers but also meant they needed to check credit carefully. Past lending shows that banks must assess cash flow and monitor closely, since MSMEs are sensitive to market and liquidity changes. 

Experts’ views on the Union Budget expect a continued push for simplified compliance and regulatory reforms that reduce costs for MSMEs, helping them grow without disproportionate risk of defaults while banks maintain disciplined credit assessment practices 

The Union Budget 2026 will continue to shape India’s banking and financial services ecosystem. Its fiscal, regulatory, and digital policy choices directly impact credit flows, asset quality, risk management, financial inclusion, and innovation. By observing trends in past budgets, institutions and investors can anticipate areas of opportunity and prepare for evolving financial landscapes.