Non-banking financial companies have emerged as a vital pillar of India’s financial architecture, especially in driving credit growth and deepening financial inclusion. Between March 2021 and March 2025, their gross loan advances doubled—from ₹24 trillion to ₹48 trillion—highlighting their expanding footprint. Yet, this growth masks structural vulnerabilities that could undermine long-term sustainability.
While acknowledging their contribution, finance minister Nirmala Sitharaman recently set an ambitious target. NBFCs should account for 50% of the total credit disbursed by scheduled commercial banks by 2047. This is both a vote of confidence and a clarion call for reform.
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NBFCs: Complementary, not peripheral
Often referred to as shadow banks, NBFCs provide a critical alternative to traditional banks by diversifying sources of credit. Over time, the distinction between banks and shadow banks has blurred. Once seen as marginal players, many NBFCs have grown to rival banks in scale and outreach, especially in segments like housing finance, vehicle loans, and microfinance.
However, the term shadow also implies opacity and regulatory asymmetry. Unlike banks, shadow banks are not allowed to accept demand deposits and operate with less stringent regulatory oversight—exposing them to liquidity, credit, and governance risks. This was starkly illustrated during the IL&FS crisis of 2018, which revealed deep asset-liability mismatches and triggered a funding squeeze across the sector.
Structural weaknesses remain
Despite tighter regulation since the IL&FS and DHFL collapses, several stress points persist. One is the cost and stability of funding. Unlike banks that mobilise low-cost deposits, NBFCs depend on more expensive instruments such as bank borrowings, non-convertible debentures (NCDs), commercial papers, and external commercial borrowings. This financing structure is especially burdensome for smaller shadow banks, which face higher risk premiums in India’s underdeveloped corporate bond market.
The RBI has responded with increased scrutiny—tightening norms on asset classification, enhancing risk weights on unsecured lending, and restricting bank credit flow to riskier NBFCs. While such measures seek to pre-empt systemic risk, they have added to borrowing costs and constrained growth.
Sitharaman has urged NBFCs to adhere to the RBI’s Fair Practices Code, emphasising the importance of responsible lending based on borrowers’ repayment capacity. She also called for humane recovery practices, warning against sacrificing customer well-being in the pursuit of aggressive expansion.
Asset quality and profitability
While the gross non-performing asset ratio of NBFCs has improved—from 6.4% in March 2021 to 3% in March 2025—certain segments remain fragile. Microfinance-focused NBFCs, in particular, are under stress. These firms reported a 95% decline in profits and rising delinquencies, as high-risk borrowers continue to struggle in a volatile economic environment.
Credit costs are expected to rise from 2.6% in FY24 to 4% in FY25, putting pressure on margins. For firms that cater to underserved and financially vulnerable customers, this could prove to be an existential threat. Sitharaman has rightly advocated for data-driven risk management to monitor liquidity, credit, and concentration risks—highlighting the need for NBFCs to avoid overstretching their balance sheets.
The fintech disruption
Competition is also intensifying. Fintechs have leveraged data analytics, application programming interfaces (APIs), and artificial intelligence to deliver frictionless financial services—often outpacing NBFCs burdened with legacy systems. The growing presence of banks in rural and semi-urban markets adds to the competitive pressure.
Some NBFCs have responded by partnering with fintechs or entering co-lending arrangements with banks. While such collaborations promise operational efficiency and wider outreach, they demand investment in interoperable digital platforms, robust data infrastructure, and regulatory compliance—an expensive proposition for many smaller players.
Diverse yet vulnerable ecosystem
India has over 9,000 registered NBFCs, ranging from large infrastructure financiers to niche lenders specialising in vehicle loans, gold loans, or consumer durables. This diversity is a strength—but also a regulatory challenge. NBFCs should be treated as complementary partners to banks, not as competitors.
That partnership, however, requires a regulatory architecture that is both enabling and vigilant. The RBI’s shift toward risk-based supervision and tiered regulation is a step in that direction. But more is needed—especially to address funding constraints, cyber vulnerabilities, and capacity gaps among smaller NBFCs.
If NBFCs are to match 50% of the credit volume of scheduled commercial banks by 2047, they must first resolve pressing internal challenges. Addressing liquidity stress, improving asset quality, investing in technology, and enhancing governance will be crucial.
At the same time, the policy framework must evolve to support this transformation. A vibrant NBFC sector—built on sound regulation, sustainable financing, and technological agility—can become a durable pillar of India’s financial future. But the road to 2047 demands nothing short of structural change.