NBFC funding: The old description of non-banking financial companies as lenders at the edges of Indian finance is out of date. RBI Deputy Governor Shirish Chandra Murmu put numbers to their rise on September 3. NBFC credit is now about 16.7% of nominal GDP, up from 15.9% a year earlier, and is equivalent to roughly 27% of the credit extended by scheduled commercial banks. The larger the sector becomes, the greater the consequences if its funding comes under stress. That is why Murmu’s warning on liquidity deserves attention.
The warning does not come from a sector in distress. The RBI’s June 2026 Financial Stability Report describes NBFCs as resilient, with strong capitalisation and declining asset impairment. Gross non-performing assets were 2.4% at end-March 2026 and the capital adequacy ratio was 24.6%. The issue, therefore, is how to make a growing sector less vulnerable to the next bout of market stress.
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NBFC liquidity risk has not disappeared
NBFCs perform an economic function that inevitably creates some maturity risk. A lender may finance a house, a truck or a business investment for several years while raising at least part of its money for shorter periods. The extent of this mismatch differs sharply across institutions. Trouble arises when an NBFC has to refinance liabilities during a period when markets have turned risk-averse. A perfectly serviceable loan book does not generate cash quickly enough if large borrowings fall due and refinancing dries up.
India has seen this happen. The IL&FS defaults in 2018 damaged confidence well beyond the company itself. The RBI subsequently recorded liquidity stress and higher borrowing costs across the NBFC sector, followed by a shift towards longer-term borrowing and greater reliance on banks. The lesson from that episode was straightforward: credit quality alone cannot protect a lender whose funding model leaves it exposed to a sudden loss of market access.
Regulation has since become tighter. The RBI strengthened its liquidity-risk framework in 2019, placed greater responsibility on boards and asset-liability committees, and introduced liquidity coverage requirements for specified NBFCs from December 2020. These changes have reduced some of the vulnerabilities exposed by IL&FS. Murmu’s speech suggests that the job is unfinished. Past liquidity episodes, he said, showed the danger of funding concentration and excessive dependence on short-term wholesale money.
Diversification does not require every NBFC to tap every conceivable source of money. It requires a funding model that does not seize up when one important channel closes. Large lenders should be able to draw on bank finance and bond markets according to conditions. Eligible institutions may also use deposits, while securitisation and loan assignments provide another route for converting assets into funding.
A deeper corporate bond market would help, as Murmu argued. But such a market cannot be created by exhorting investors to buy NBFC paper. Investors need adequate disclosure and confidence that governance standards match the complexity of the balance sheet. Funding diversification and governance are therefore connected. An NBFC that wants broader access to market finance has to earn it.
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Securitisation should transfer risk
Murmu’s argument on securitisation goes further. For many lenders, securitisation has primarily been a way to obtain liquidity: a pool of loans is sold or repackaged, giving the originator cash that can be used for fresh lending. Used properly, however, securitisation can also distribute credit risk and release capital.
That distinction matters. If an NBFC originates a large pool of vehicle, housing or business loans and retains all of them on its balance sheet, it retains the associated credit risk. Selling a properly structured pool can transfer part of that risk to investors whose portfolios and risk appetite allow them to hold it.
There is an obvious hazard. A lender that expects to sell loans may become less careful about whom it lends to. The RBI’s securitisation rules address this through minimum holding and retention requirements. Originators must retain an economic interest in securitised assets, giving them a continuing stake in how those loans perform. The objective is to allow risk to move without allowing responsibility for underwriting to disappear with it.
This is where India’s securitisation market has to mature. Its usefulness should be judged by whether it produces genuine risk transfer and a wider investor base, rather than by the volume of short-term liquidity it provides to originators. Transparency becomes important here as well. Investors have to understand the loans they are buying and the risks embedded in the pool.
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NBFC funding: Growth requires lending discipline
The liability side is only half of an NBFC balance sheet. Murmu also cautioned lenders against allowing faster credit growth to weaken underwriting. The RBI wants stress testing and early-warning systems to improve as balance sheets expand. Technology can help identify signs of borrower stress earlier, especially where lenders have access to richer cash-flow and transaction data. It cannot rescue a loan that should not have been made.
This matters because NBFCs have become important by doing things that conventional banking often finds difficult or expensive. They have built expertise in vehicle finance, affordable housing and infrastructure lending, while specialised lenders have developed businesses around particular industries and borrower groups. Their ability to assess customers outside the conventional collateral-based model is an economic asset. Weak underwriting would destroy that advantage.
India will need more non-bank credit as its economy expands. Banks cannot efficiently serve every borrower or finance every niche on their own. The policy question is how that expansion will be funded and what risks will accompany it. A sector whose credit is already equivalent to more than a quarter of scheduled commercial bank credit cannot base its resilience on the assumption that refinancing markets will always remain open. The stronger NBFCs become in good times, the better placed they will be to keep lending when money becomes scarce.