Budget 2026: To ease infra funding crunch, govt mulls ₹25,000 crore risk guarantee fund

The proposal was submitted to the finance ministry by a committee formed under the National Bank for Financing Infrastructure and Development (NaBFID), the people cited above said on the condition of anonymity. The National Credit Guarantee Trustee Co. (NCGTC) is likely to underwrite development risks for infrastructure projects, allowing banks and financial institutions to lend on easier terms.

The move comes amid rising project delays, cost overruns, and higher borrowing costs that have long constrained investment flows into India's infrastructure sector. Government estimates suggest India needs roughly $2.2 trillion in infrastructure investment by 2030 to sustain its $7 trillion growth ambition.

Nominal fee

“The risk guarantee fund would cover a portion of loans extended by banks and financial institutions to infrastructure projects for a nominal fee. This would reduce financing risk, enable higher credit flow and allow lenders to take larger exposures. While the guarantee cost would be added to borrowing costs, the impact on lending rates is expected to be minimal," said one of the government officials cited above, requesting anonymity.

The fund, which has been under discussion within the government for some time, will receive its initial corpus from the Union budget. The finance ministry is also in talks with private and public sector financial institutions to participate in the fund. The fund will function on the lines of the Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE), launched in 2000 to provide collateral-free credit to micro and small enterprises.

“NaBFID submitted its recommendations a couple of months ago, and the proposal is now expected to be considered in the upcoming Union budget," said a NaBFID official, the second official mentioned earlier.

Queries emailed to the spokespersons of the finance ministry, the department of financial services (DFS) and NaBFID on December 25 remained unanswered till press time.

Flow chart

The initiative is expected to ease financing risks for banks and financial institutions by encouraging higher credit flow at competitive rates and enabling them to take larger exposures to infrastructure projects. Experts say the fund could serve as a vital credit enhancement tool, provided its risk pricing and underwriting are managed effectively.

India’s capital expenditure target for FY26 stands at ₹11.21 trillion, or about 3.1% of GDP, compared with ₹11.11 trillion, or roughly 3.4% of GDP, in the previous year’s Budget.

Experts say external risks remain a key dampener for funding large infrastructure projects.

“Funding hesitance in infrastructure stems less from growth prospects and more from policy uncertainty and other non-commercial risks. A ₹25,000-crore risk guarantee fund would act as effective credit enhancement, and a public-private partnership structure can balance efficiency with governance," said Vivek Iyer, partner and financial services risk leader, Grant Thornton Bharat.

Delays

While central capital expenditure aims to draw more funds into infrastructure, project delays and cost overruns continue to restrict financing flows.

In the roads and highways sector, as many as 574 National Highway projects awarded over the last five years, with cumulative project costs of about ₹3.60 trillion, have overshot their original completion timelines, according to data shared by the ministry of road transport and highways in the Rajya Sabha on 17 December.

Over 300 projects face delays of up to one year, while 253 projects have been delayed by one to three years. Another 21 are running more than three years behind schedule, excluding those under consideration for termination or foreclosure.

The ministry also said 133 National Highway projects, with a total cost of about ₹1 trillion, have been awarded but construction has not yet begun. These projects are stalled due to non-fulfilment of prerequisites such as availability of encumbrance-free land and pending forest and wildlife clearances. Delays in achieving financial closure and submission of bank guarantees by contractors have also contributed to the hold-up.

Bond market angle

“Infrastructure financing in India is largely driven by banks and specialized NBFCs. But banks rely on short-term CASA and deposits, creating asset-liability mismatches that make them ill-suited for long-duration infrastructure financing," said Manish Aggarwal, partner, strategy, risk & transactions, and national leader—Infrastructure, Capital Projects & Public Asset Management, Deloitte India.

“Specialized NBFCs resort to bond borrowing and on-lending and mark up the cost for their own margin, making financing cost higher. Thus, it is vital that high-quality projects are able to seek direct bond financing from institutional and retail investors," Aggarwal said.

He added that most institutional debt capital in India focuses on AA or higher-rated instruments, with limited appetite for low investment-grade debt.

“Credit enhancement serves as a bridge, where a specialized agency assesses and underwrites part of the risk for a fee, which raises the credit rating of a low investment-grade bond to AA or better, making it palatable to a larger set of investors," he said.

“Experiments have been done in the past for credit enhancement facilities, however, the costs have been prohibitive, making any scale-up unviable. The new initiative is laudable, however, its success is predicated on the underwriting ability of risk and pricing which makes the cost of the instrument viable for an infrastructure project," Aggarwal added.