India’s credit architecture is undergoing a structural transformation. As banks conserve capital for long-tenor loans and regulatory priorities, non-bank finance companies (NBFCs) and private credit funds have become indispensable conduits of capital. Their growth is not a cyclical aberration but a structural shift, reshaping how credit is originated, priced and delivered. If policy sustains innovation while curbing excesses, these parallel engines can support India’s next phase of growth.
NBFCs have grown into a vital source of credit for retail borrowers and small enterprises. The Reserve Bank of India’s June 2025 Financial Stability Report records that NBFC balance sheets expanded 20.7% year-on-year, supported by strong capital adequacy (25.8%) and improving asset quality. Their importance is most visible in lending to micro-entrepreneurs. A recent SIDBI–CRIF study shows NBFCs hold 42.4% of outstanding loans to sole proprietors as of June 2025, consolidating their role in credit delivery to the semi-formal economy. This is precisely where banks are less nimble and risk-averse.
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Co-lending and securitisation
The expansion of NBFC credit has been facilitated by two institutional innovations.
First, co-lending. The RBI’s Co-Lending Directions, 2025, effective January 2026, extend the framework beyond priority sectors, mandate minimum risk-sharing, and impose uniform standards on operations. This allows banks to conserve balance-sheet capital while leveraging NBFC origination.
Second, securitisation. Regulatory adjustments have enabled securitisation of stressed retail assets. Securitised standard loans rose 25% to ₹2.3 trillion in 2024-25, widening funding channels for NBFCs and allowing banks to recycle capital.
Private credit fills the corporate gap
Private credit has emerged as the capital of choice for complex corporate requirements—refinancings, acquisitions, and structured growth finance. According to EY, $9 billion of private-credit investments were recorded in H1-2025, a 53% rise year-on-year. India now accounts for up to 30% of Asia-Pacific fundraising.
The Shapoorji Pallonji Group’s $3.1–3.5 billion raise was the largest such deal in India, revealing investor appetite for bespoke credit. Other transactions, such as $600 million for the Manipal Group, highlight the growing scale of private-credit participation.
This shift has been aided by policy. The withdrawal of indexation benefits for debt mutual funds in April 2023 redirected high-net-worth investors towards AIFs and private credit. Meanwhile, the SEBI AIF Regulations, last amended in May 2025, tightened governance while clarifying investment norms.
Regulation: from tightening to calibration
Supervisors have moved swiftly to address emerging risks. The RBI raised risk weights on unsecured personal loans and bank exposure to NBFCs in 2023. In February 2025, it restored bank-to-NBFC exposures to the rating-linked Basel grid, acknowledging stabilisation while maintaining vigilance.
On AIFs, the RBI acted against evergreening in December 2023. Clarifications in March 2024 restricted provisions to tainted portions, while draft rules in May 2025 proposed steadier exposure caps and prospective application. The approach has been measured: tighten where necessary, then calibrate.
Guardrails for the future
Three consequences follow.
One, NBFCs extend the frontier of credit—delivering sachet-sized loans to micro-enterprises at viable economics. Two, securitisation and co-lending reduce bank balance-sheet stress, freeing capacity for infrastructure and long-tenor lending. Three, private credit fills bespoke financing gaps that banks and public markets cannot address quickly or flexibly. Together, these developments reshape the financial system without displacing its core.
The forward agenda is clear. Capital requirements for NBFCs must remain counter-cyclical. Co-lending should be standardised with uniform KYC rails and NPA tagging. Securitisation markets need deeper participation from insurers and pensions. Private credit must be governed with transparency, accredited-investor regimes, and GIFT-City platforms. Above all, MSMEs must be better integrated into credit bureaus through GST and e-invoice data, compressing recovery timelines under the Insolvency and Bankruptcy Code.
NBFCs and private credit are no longer marginal actors. They are embedded in India’s growth finance architecture. With prudent guardrails and calibrated supervision, they can deliver more credit to more borrowers at a lower systemic cost—a transformation as consequential as any bank reform of the last two decades.
NBFCs and private credit have moved from the margins to the mainstream of India’s financial system. Their rise is a response to the economy’s expanding needs and the limitations of conventional banking. With prudent regulation, transparent markets and institutional guardrails, these two engines can deepen financial inclusion, reduce systemic costs, and ensure that India’s growth ambitions are met with the capital they require.