Budget 2026 (Pt. 2): Structural Changes and Infrastructure Opportunities

Introduction

The 2026 Budget announced the merger of Power Finance Corporation and Rural Electrification Corporation. This would be the first step in improving scale and efficiency in public sector NBFCs. A High Level Committee on Banking for Viksit Bharat will be formed alongside. These signal dual shifts that will reshape how lenders compete.

Budget 2026 also commits ₹12.2 lakh crore to public capex in FY27. It introduces market makers for corporate bonds. Municipal bonds above ₹1,000 crore get ₹100 crore incentives. The lending landscape transforms twice: restructured public entities will compete harder, and capital markets will enable direct corporate access.

For private NBFCs and mid-sized banks, this creates pressure on product mix, funding costs, and where they stand in the market. The window to reposition is FY27-FY29.

In Part 1, we examined MSME credit systems through TReDS-CGTMSE, SME Growth Fund and sectoral opportunities. Part 2 covers how lenders compete, infrastructure financing, regulatory change, and strategic choices.

(A) Public NBFC Restructuring

What Merging Enables

PFC and REC both finance power sector projects, creating overlap. Merger cuts costs and improves sectoral knowledge. As "a first step," restructuring may extend to IREDA, SIDBI, and NHB, creating larger public lenders with lower funding costs.

Merging enables three new skills. Combined balance sheets support larger co-lending commitments with PSU banks for infrastructure and renewable projects. Larger capital bases enable expansion into adjacent sectors like urban infrastructure, smart cities, or distributed renewable energy. Scale supports investment in digital platforms and fintech partnerships for faster origination and servicing.

How Lenders Compete

Infrastructure project finance sees direct rivalry as public NBFCs bid at tighter spreads. MSME supply chain finance faces indirect pressure when large public projects create vendor financing chances, allowing cross-sell of working capital. Co-lending combinations favor public NBFCs as PSU banks prefer public partners due to ownership alignment.

Private NBFC Edge

Private NBFCs must stand out through three dimensions.

Build niche expertise: In infrastructure, focus on small renewable projects (under ₹50 crore) or rural road contracts. In MSME, specialize in sectors like gems & jewelry, auto components, or textiles where sectoral knowledge creates barriers. In retail, focus on products like gold loans or used vehicle finance.

Compete on speed: Consider a mid-sized developer needing bridge finance for a stalled project. An MSME exporter requiring pre-shipment credit within 48 hours. They value speed over 25 bps. Approval cycles of 3-5 days versus 15-20 days create genuine competitive advantage when borrowers face time-critical opportunities.

Cut costs with technology: Digital acquisition, automated underwriting, and straight-through servicing reduce operating costs by 100-150 bps. This narrows the funding cost gap. NBFCs that can process MSME loans in 48 hours while less nimble entities take weeks, gain market share despite higher base funding costs.

(B) Infrastructure Capex Opportunities

₹12.2 Lakh Crore Breakdown

Public capex announcement covers multiple sectors:

• Transport infrastructure: Dankuni-Surat Eastern Freight Corridor extension, twenty new National Waterways, coastal cargo connectivity

• Social infrastructure: University townships, specialized medical hubs, tourism development centers

• Urban systems: Smart city expansion, water supply networks, waste management facilities

• SASCI allocation: ₹2 lakh crore for state-level infrastructure across FY27-FY29

Infrastructure Risk Guarantee Fund

The Fund provides partial credit guarantees during project construction, addressing development uncertainty while running cash flows remain viable. Lower capital needs from guarantee coverage enable more competitive pricing. Institutions can originate larger portfolios without equal capital.

Product Opportunities

Infrastructure capex creates financing opportunities beyond direct project loans:

• Equipment finance: Construction machinery, earthmoving equipment, specialized vehicles

• Vendor working capital: Bill discounting for suppliers, receivables financing

• Co-lending arrangements: Partnership models with public NBFCs for risk sharing

• Structured products: Mezzanine debt, junior tranches, subordinated facilities 

Peak disbursement spans FY27-FY29 as projects move from sanction to execution. The ₹2 lakh crore SASCI budget depends on state capacity, requiring geographic spread to manage risk.

(C) Banking Committee and Regulatory Change

Committee Scope

The High Level Committee on Banking for Viksit Bharat will examine lender readiness through 2047. Potential areas include:

• NBFC-bank regulatory convergence

• Co-lending framework updates

• Digital lending norms

• Capital adequacy updates favoring data-driven underwriting

Timeline and Precedent

The Nachiket Mor Committee (2014) led to payments banks and small finance banks. The PJ Nayak Committee (2014) shaped PSU bank governance reforms.

Committees typically need 12-18 months for reporting, with phased rollout over 2-3 years. If the current committee reports by mid-FY27, changes would start from FY28.

Building Readiness

Lenders should build flexibility before mandates arrive. Enhanced board oversight for digital operations helps. Modern credit models support multiple risk weight scenarios. Partnership systems prepare for co-lending expansions.

Regulatory change rewards those who prepare early over those who wait for final rules.

(D) Corporate Bond Market Depth

Liquidity Systems

Budget 2026 adds market makers with funding access and derivatives on bond indices. Total return swaps enable exposure without holding securities. The ₹100 crore incentive for municipal bonds above ₹1,000 crore encourages larger, more liquid issues.

These reduce bid-ask spreads and enable active secondary trading.

NBFC Repositioning

Deeper bond markets shift opportunity from vanilla lending to specialized segments.

Following strategies could be looked at:

• Co-investment models to create part-hold, part-sell approaches

• Targeting mid-corporates and SMEs needing relationship lending with flexible structures

• Structured credit products including mezzanine and junior debt to fill gaps vanilla bonds cannot address

Market systems build through FY27-FY29. Meaningful shift emerges post-FY29. NBFCs have 3-4 years to reposition before vanilla corporate lending faces structural pressure.

Overall Impact & Product Strategy

Private NBFCs face dual pressure from restructured public NBFCs and deeper capital markets. Strategic responses must happen at the product level. Budget 2026's impact varies by segment, requiring different strategies. The diagram below maps net impact and recommended strategic plays across four core lending categories.

The product strategy matrix reveals different impacts. Infrastructure and MSME show positive opportunities through partnerships and platform integration. Retail secured remains neutral, requiring niche focus. Corporate lending faces negative pressure, demanding structured credit capabilities.

Conclusion

Budget 2026 creates major long-term implications via public NBFC restructuring and bond market depth. Strategic responses differ by exposure. Niche specialists build technology edges. Infrastructure lenders develop co-lending partnerships. Structured credit matters to rival bond market depth.

Part 1 examined MSME credit via TReDS-CGTMSE and manufacturing opportunities. Part 2 analyzed how lenders compete, infrastructure layers, regulatory change, and capital shifts.

Together, these reveal landscape shifts. The imperative is positioning early during FY27-FY29 before defensive margin squeeze becomes unavoidable. Lending infrastructure choices determine competitive position in the new credit paradigm.

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