Non-Banking Financial Companies (NBFC) Sector: Comprehensive Industry Analysis Report | Scrolls

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Aug 10
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by KarNivesh | 10 August, 2025

India’s financial system is powered by more than just banks. Non-Banking Financial Companies (NBFCs) have quietly become one of the strongest pillars in the economy, now managing assets worth ₹52 trillion (as of FY24). They account for nearly a quarter of India’s credit market and are growing faster than banks in many segments.

If banks are the highways of finance, NBFCs are the smaller, flexible roads reaching every corner—especially places banks find hard to serve.

What Exactly Are NBFCs?

NBFCs are companies registered under the Companies Act that offer financial services like loans, credit, leasing, and investments—but they cannot accept demand deposits (like a savings account in a bank).

They specialize in:

Vehicle loans
Gold loans
Affordable housing finance
Loans to small businesses (MSMEs)
Consumer durables financing

As of 2024, there are 9,618 registered NBFCs, grouped by:

Type of service (e.g., asset finance, housing finance, microfinance)
Scale (RBI’s “Scale-Based Regulation” framework: Base, Middle, Upper, and Top Layers)

Their biggest strength? Serving customers in rural areas, small businesses, and those without a long credit history.

The Growth Story

In FY20, NBFC assets under management (AUM) stood at ₹26.3 trillion. By FY24, this had jumped to ₹41.2 trillion — 16% annual growth. The momentum is set to continue, with AUM projected at:

₹47.8 trillion in FY25
₹55.5 trillion in FY26

This is 15–17% growth each year, outpacing banks. Even during COVID-19, NBFCs bounced back quickly thanks to niche focus and technology adoption.

Globally, the NBFC sector is part of a ₹18,176 trillion market in 2024, projected to reach ₹21,541 trillion by 2034 — but India’s growth is among the fastest.

Where They Lend

NBFC lending is shifting more towards retail loans—personal loans, housing, vehicle finance—which now make up 58% of their portfolio (up from 42% in 2018). This gives them better margins and reduces risk from depending on a single business sector.

The Big Players

The top NBFCs include:

Bajaj Finance – Market leader with ₹1.45 lakh crore AUM.
Jio Financial Services – A digital-first new entrant.
Cholamandalam Investment & Finance – Strong in vehicle and SME loans.
Shriram Finance – Focus on commercial vehicles.
Muthoot Finance – Leader in gold loans.

Others like HDB Financial Services, SBI Cards, Aditya Birla Capital, L&T Finance, and Mahindra Finance are also key competitors.

While the big 10 dominate, there are 507 systemically important NBFCs and thousands of smaller ones serving niche needs.

Technology is Changing the Game

NBFCs are going through a digital revolution:

AI & Machine Learning: Smarter credit scoring using alternative data (e.g., utility bills, online transactions).
Digital Lending Platforms: Loan approvals in minutes instead of weeks.
e-KYC: Faster, paperless onboarding.
Blockchain: Secure transactions and document verification.
Data Analytics: Predicting customer needs and risks.
Fintech Partnerships: Collaborations with tech companies for better tools.

Today, more than 60% of NBFC loans are digital, reaching even rural customers who never had bank access before.

Strengths, Weaknesses, Opportunities, Threats (SWOT)

Strengths:

Deep expertise in niche lending areas.
Strong rural presence and last-mile connectivity.
Quick decision-making and flexible terms.

Weaknesses:

Higher borrowing costs compared to banks.
Limited ability to take low-cost deposits.
Dependence on wholesale funding, which can be unstable.

Opportunities:

India’s rising middle class and urbanization.
Government push for financial inclusion.
Huge MSME credit gap (₹20–25 lakh crore).
Growth in infrastructure and green finance.

Threats:

Increasing competition from banks and fintechs.
Regulatory changes raising compliance costs.
Interest rate and economic slowdown risks.

What Drives Demand and Supply

Demand Side:

More people taking personal, housing, and vehicle loans.
Small businesses needing quick, customized credit.

Supply Side:

Bank funding to NBFCs is rising due to RBI support.
Capital market borrowing (NCDs, bonds) adds liquidity.

Interest rates matter: When the RBI cuts rates, NBFCs benefit from cheaper borrowing and can pass on savings to customers—although not always equally across all segments.

The Rulebook – RBI Regulations

RBI’s Scale-Based Regulation (SBR) introduced in 2023 set four layers of NBFC classification. Larger NBFCs face rules similar to banks, including liquidity coverage ratios and governance standards.

Other key regulations:

15% capital adequacy requirement (stricter than banks).
Digital lending guidelines for customer protection and data privacy.
Co-lending rules allowing NBFCs and banks to jointly lend.
Priority Sector Lending benefits for banks funding NBFCs.

Government schemes like partial credit guarantees and liquidity support help NBFCs in tough times.

Investments flows

Investor interest is strong:

PE/VC investments rose 70% in 2024 to ₹9,960 crore (from ₹5,941 crore in 2023)
HDB Financial IPO raised ₹1,037.5 crore
Tata Capital’s planned IPO aims for ₹1,427.6 crore
Biggest deal: HDFC–HDFC Bank merger worth ₹3.32 lakh crore

NBFCs fund themselves mainly through bank loans (55%), bonds (25%), commercial paper (8%), and equity (7%).

Challenges

NBFCs face:

Funding volatility (as seen in the IL&FS and DHFL crises).
Asset quality pressures in microfinance and unsecured loans.
Heavy compliance costs under new regulations.
Competition from banks, fintechs, and corporates entering finance.
Cybersecurity and tech risks.

Economic slowdowns and inflation can also affect customers’ repayment ability.

The Road Ahead

The outlook is bright. Key growth drivers:

India’s economic expansion and urbanization.
Digital transformation cutting costs by up to 20%
Massive potential in rural finance, MSME credit, and green projects.
Partnerships with banks and fintechs.
International expansion possibilities.
Renewable energy and green finance opportunities

NBFCs with strong governance, diversified portfolios, and tech adoption are best placed to thrive. The sector is expected to keep growing at double-digit rates, playing a vital role in India’s journey to grow at 15–20% CAGR, with well-run companies delivering 15–25% return on equity — higher than banks.

NBFCs may not have the “bank” title, but they are equally important to India’s financial health. They are faster, more flexible, and closer to the customer—often reaching where banks don’t.

With the right balance of innovation, regulation, and customer focus, they are poised to keep expanding and shaping India’s financial future.