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Raman Aggarwal, CEO, Finance Industry Development Council (FIDC)Non-Banking Financial Companies (NBFCs) have emerged as vital conduits of credit in India, particularly for populations that traditional banks have struggled to reach, from gig economy workers, micro-entrepreneurs and self-employed to salaried individuals in Tier 2 and Tier 3 towns. As the financial ecosystem evolves, the relevance and importance of NBFCs has only grown, especially in light of the recent regulatory developments, sectoral trends and deeper penetration of technology.
Why NBFCs Matter – Now More Than Ever
The RBI’s ongoing recalibration of the regulatory landscape where ‘harmonization’ is the key, underscores one reality: NBFCs are no longer peripheral players. They have evolved from being the shadow players to now being the mainstream creditors in the retail segment. In 2023, they contributed to 12.6% of India’s GDP and accounted for nearly 30% of total non-food credit. They outpaced commercial banks in credit growth during fiscal year 2025 clocking a sharp 20% increase compared to the banking sector’s 12% rise, according to a report by the Boston Consulting Group. Their growing systemic importance necessitates both deeper scrutiny and greater recognition.What explains their rise? India’s formal banking architecture prioritizes formally documented borrowers, yet over 85% of India’s workforce remains informally employed. This structural gap is precisely where NBFCs operate most effectively. According to CRIF High Mark, NBFCs continue to grow their share in new originations, particularly in small-ticket and “new to credit (first-time)” borrower segments.
NBFCs differ from regular banks on several counts. While banks have a major share of wholesale lending, giving huge credits to corporates and classes like agriculture and services, NBFCs essentially deal with retail borrowers. They are individuals and small businesses, some of which may be turned down by banks.
As of the end of financial year 2024, retail borrowers got just 34% of total bank credit in India. NBFCs, however, had much greater retail exposure, with nearly 48% of their credit going to individuals. This is a conscious effort by NBFCs to serve people who are generally ignored by mainstream banks, such as low-income, informal workers, or those with low or no credit scores. NBFC credit to MSMEs has grown much faster as compared to banks.
Financial Inclusion in Action
The birth and the growth of NBFCs for the last 7-8 decades has been due to their higher risk appetite coupled with their ability to reach out to the unbanked / underbanked segment which are perceived as high risk borrowers. NBFCs have thus made credit accessible, faster, and more inclusive. Their agility lies in their deep-rooted understanding of the ground realities, leveraging alternate data, digital KYC, and behavioral underwriting. These innovations allow them to underwrite a ₹25,000 working capital loan to a Kirana store owner in Bareilly or a ₹5 lakh personal loan to a gig worker in Chennai, transactions that most banks would consider too risky or uneconomical. That is why NBFCs can be called as the authors of financial inclusion story in India.Industry data indicates that 48% of NBFC credit goes to retail borrowers, far outpacing the proportion extended by traditional banks in this segment. Importantly, digitization enabled through platforms like Account Aggregators (AA), OCEN, and ONDC has improved service delivery and reduced friction for borrowers.
Contextualizing the Cost of Credit
Much of the criticism NBFCs face stems from perceptions of high interest rates. But this narrative misses context. NBFCs raise capital at 8–14% (depending on their size), unlike banks that enjoy access to low-cost CASA deposits, and cater to higher-risk profiles. Added to it are: higher cost of reaching out to the bottom of the pyramid borrowers with no back stop, non-availability of any tools for direct recovery in spite of lending to the high-risk borrower segment and disparity in taxation matters as compared to the other regulated creditors. Moreover, the competitive landscape is intense. With more than 9,200 registered NBFCs and numerous fintech entrants, borrowers today enjoy more choice and transparency than ever before. The availability of comparison tools and RBI’s disclosure mandates ensures that the market operates with increasing accountability.
The contextualizing of the lending rates of NBFCs gets strengthened by the figures (as reported in the RBI’s Financial Stability Report dated 30th December, 2024) of Return on Assets (ROA) being 2.9 and Return on Equity being 12.6 (as on 30th September, 2024) which are very much in tune and sync with the prevailing market dynamics.
Are Borrowers Being Exploited?
To suggest so is to not only undermine the agility and awareness of modern-day borrowers but also negate the most important aspect of NBFC lending which is the personal touch which NBFCs provide by being flexible and accommodative to the needs of their borrowers. Research by institutions such as Dvara Research and the Bharat Inclusion Initiative shows that even first-time borrowers demonstrate an understanding of their repayment obligations. In fact, NPA levels for NBFCs in small-ticket loans remain relatively contained, signaling that risk is being managed prudently. For many borrowers, the choice is not between high and low rates, but between: formal credit and informal lenders charging 60% annual interest or creditors with rigid operations and creditors who are open to providing tailor made services as per their needs.
Regulatory Realignment and Sectoral Maturity
Over the past few years, RBI has harmonized the regulation of NBFCs with that of banks and FIs. It has also strengthened oversight through the Scale Based Regulatory framework, enhanced capital requirements, stringent governance norms, a forward-looking provisioning regime based on the expected credit loss (ECL) and enhanced transparency by way of greater disclosures. These measures elevate the standards for small and large/ systemically important NBFCs, moving them closer to the regulatory rigor applicable to banks, without losing the sector’s core flexibility.More than just a regulatory compliance measure, ECL adoption equips NBFCs to thrive in a world marked by increasing economic volatility. The ECL framework offers a range of features that significantly improve risk modelling and asset quality for NBFCs. It shifts credit risk management from a backward-looking incurred loss model, which recognizes losses only after they materialize, to a forward-looking approach that anticipates potential losses.
The Reserve Bank of India also rolled back the higher risk weights on bank loans to NBFCs when lending dropped significantly. This aims to rebuild bank confidence in extending credit during the economic slowdown. Easing capital requirements for banks’ lending to NBFCs and the recent cut in monetary policy rates represent a strategic step supporting liquidity flow within the financial sector.
This regulatory arc reflects the maturing of the NBFC sector: from being seen as stop-gap alternatives to becoming central pillars in India’s credit delivery architecture. And this maturity has also caught the eye of apex world bodies like The World Bank and the IMF who not only recognize but also talk high of the impact that the NBFCs are making to the financial landscape of the fastest growing economy in the world today.
Rethinking the Narrative
It is time to shift public discourse away from binary portrayals of NBFCs as either saviors or exploiters. A more accurate lens would recognize their role as innovators within a regulated ecosystem. From being coined as shadow banks, NBFCs have steadily evolved into trusted partners of the formal financial system, acting as co-lending and banking correspondents (BCs), especially in underserved regions.
In the same spirit, allowing NBFCs to offer credit lines over UPI could unlock the next phase of inclusion. It would support more transparent usage of funds, enable real-time credit reporting, and empower lenders with better control over disbursals, creating a win-win for consumers and the broader credit ecosystem.
Reimagining the Future: Innovation with Responsibility
As policymakers deliberate the next phase of India’s financial inclusion journey, the goal must be to balance innovation with safeguards. Promoting borrower education, strengthening disclosure standards, and testing new models through regulatory sandboxes can achieve more sustainable outcomes. With greater use of modern tech backed by AI, it is the increase in supervision and not regulation that shall pave the path ahead.
We must remember that a tech-enabled NBFC today can assess a borrower, approve a loan, disburse funds, and collect repayments, all in a matter of hours. This isn’t just convenience, it’s a transformation of access at scale. Increased collaboration between banks and non-banks shall be the order as we march towards building a Viksit Bharat.
Conclusion
NBFCs are not outliers to be reined in, they are critical complements to banks, especially in a country as large, diverse, and informally employed as India. Empowering them responsibly may just be the key to building a more inclusive, resilient, and responsive financial system. The time has come to remove the negative connotation of being “Non-Bank” and address them simply as Finance Companies (FCs).
(This article is authored by Raman Aggarwal, CEO, Finance Industry Development Council (FIDC). All views expressed are personal.)
- Published On Jul 27, 2025 at 03:30 PM IST
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