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India today has set an ambitious goal to become a $5 trillion economy by 2027-28. Although a strong financial system is very important to achieve this goal. Proper flow of money, easy access to credit, and financial inclusion are the main driving forces of this journey.
Non-Banking Financial Companies (NBFCs) come into the picture in this case. They have stood outside the conventional banks and created an alternative source of credit and financial services for millions of people and businesses. The contribution of NBFCs is evident from small enterprises to infrastructure projects.
Now the question arises, “Is this NBFC sector really capable of fulfilling India’s $5 trillion dream?” The answer can be found by analyzing their strengths, challenges, and potential.
The presence of NBFCs in India’s financial sector can no longer be ignored today. As of March 2023, there are over 9,400 NBFCs registered with the Reserve Bank of India (RBI) in the country. The sector’s loan-to-GDP ratio stands at 12.6%. But NBFCs’ contribution to the total assets of the banking sector has increased from 13% to 18.7% in the last decade.
In addition, as of March 2024, the capitalization of the NBFC sector is quite strong—CRAR 26.6%, GNPA ratio 4.0% and ROA 3.3%. These figures make it clear that NBFCs have recovered and also built a sound financial foundation. Therefore, they can be called the backbone of the Indian economy.
The next phase of India’s economy largely depends on the availability of credit. NBFCs are playing a crucial role in this. No matter urban or rural areas, everyone is getting quick and easy loans from NBFCs.
Their contribution spread around small and medium enterprises (MSMEs), housing projects, infrastructure and rural development. NBFCs offer solutions through flexibility and innovative models, where conventional banks are often risk averse.
NBFCs are also a powerful driver in job creation and financial inclusion. When entrepreneurs have easy access to capital, new businesses start up, job opportunities increase, and economic growth accelerates. So, the role of NBFCs is essential in fulfilling the dream of a $5 trillion economy.
The co-lending model is a mechanism where NBFCs and banks lend together. This shares risk and increases credit opportunities for the customer. Through this model, banks can use the local network of NBFCs to get a source of cheap funds.
Currently, the assets under management (AUM) of co-lending have reached about ₹55,000 crore and can reach ₹1 trillion in the coming days. According to CRISIL, the annual growth rate in this sector is 35-40%.
For example, thousands of customers have already availed loans through the SBI-Yubi platform. Again, the UGRO Capital-SIDBI joint venture is playing a significant role in providing funds to the MSME sector.
So, small businesses, housing loans and personal loans are becoming more accessible. This model is taking the NBFC sector to new heights.
Securitization is a process where NBFCs raise funds by selling their loan assets to other investors. It allows them to lend to new customers quickly and also makes fund management easier.
In FY24, the amount of securitization in the NBFC sector stood at ₹1.9 lakh crore, which is the highest in the post-pandemic period. Even after the merger with HDFC Limited Bank, the growth in this sector is about 27%.
The main advantage of securitization is to allow NBFCs to provide new loans without taking on additional risk. So, liquidity is maintained, and financial assistance is provided to more customers. And the NBFC sector continues to operate sustainably.
The Reserve Bank of India has introduced Scale-Based Regulation (SBR) to bring stability to the NBFC sector. In this framework, NBFCs have been divided into four tiers—base, middle, upper and top tier. Specific rules and governance have been laid down for each tier.
This new framework has enhanced transparency and strengthened risk management. Especially in the case of large NBFCs, issues such as corporate governance, remuneration structure, and risk control have been tightened.
In the future, there is also a proposal to grant banking licenses to NBFCs with assets of more than ₹50,000 crore. This will create a balance between NBFCs and banks, and the overall financial system will be stronger. Therefore, the regulatory framework is the key to the growth and stability of the NBFC sector.
Digital transformation and fintech collaboration in the NBFC sector have become a major force today. Lending through digital platforms has now become much faster and easier.
For example, the SBI-Yubi digital co-lending platform has disbursed loans worth ₹2,030 crore to over 2.03 lakh borrowers. Kinara Capital disbursed 26,343 new loans in FY24, and its profits grew by 51%.
When NBFCs and fintechs work together, loan approvals are faster, risk assessment is technology-enabled, and customer experience is improved. Due to the data-tech model, loans are now easily available to rural areas or small businesses. This partnership drives business success and creates a true picture of financial inclusion.
NBFC-Microfinance Institutions (NBFC-MFIs) today control about 40% of the microcredit sector in India. The total loan portfolio in this sector stood at ₹4.33 lakh crore as of March 2024. The presence of NBFC-MFIs is having the biggest impact in rural and semi-urban areas.
Small traders, women entrepreneurs or small traders in everyday life are getting capital easily through them. So, it is improving personal income and the local economy. It can be said that microfinance has become one of the pillars of financial inclusion in India.
There are still some challenges with the growth of the NBFC sector. Some NBFCs have been found to have weak governance and a lack of transparency. Moreover, many NBFCs are still over-reliant on risky wholesale credit.
The Reserve Bank of India is tightening the rules for the NBFC sector. Also, the competition with banks and fintech companies is increasing day by day.
Strong risk management, sustainable lending models and good governance are essential to meet these challenges.
The loan book of the NBFC sector grew by 26% in FY24. This is expected to grow by 20-25% annually in the next few years. Future success will largely depend on innovation, financial inclusion and technology adoption.
The NBFC-fintech partnership has already created a revolution. So, credit is reaching MSMEs and the housing and infrastructure sectors easily. NBFCs will further accelerate India’s growth with a strong foundation, resilient model and support from the RBI.
Therefore, the role of NBFCs in fulfilling India’s $5 trillion dream is very promising.
NBFCs today are key drivers of financial inclusion. They are reaching out to places where conventional banks fail to reach. Co-lending, securitization, fintech collaborations and strong RBI regulation have given the NBFC sector a solid foundation. NBFCs will therefore play a significant role in India’s dream of a $5 trillion economy.
If you are an NBFC, fintech or a business and want to ensure compliance, credit expansion or sustainable growth, Enterslice can be your most trusted partner.
Our experts at Enterslice will assist you with NBFC registration, RBI compliance and business structuring. Join us today and align your growth with India’s economic dream.
NBFCs are a key driver in India's financial sector today. They are providing easy access to credit to crores of people who are outside the banking system. NBFCs' credit flow to MSMEs, housing, infrastructure and rural sectors is further strengthening the Indian economy. NBFCs are expected to play a significant role in helping India achieve its goal of a $ 5 trillion economy through technology, innovation, and financial inclusion.
Banks generally provide loans to large customers and the organized sector. NBFCs reach out to small traders, rural customers and first-generation entrepreneurs. They offer flexibility in paperwork and quick loan approval. So, NBFCs provide quick and easy solutions where banks are slow to reach. This difference has made NBFCs a key driver of financial inclusion.
Co-lending is a model of joint lending between banks and NBFCs, where risk is shared. This model helps NBFCs to access capital at a cheaper rate, while also allowing banks to reach new customers. The sector is currently growing rapidly and having a positive impact on MSMEs, housing and personal loans. Co-lending is becoming a powerful engine of growth for NBFCs.
Securitization is a process where NBFCs raise new capital by selling their loan portfolio. It gives them easy liquidity and creates opportunities to lend to new customers. In FY24, the sector transacted ₹1.9 lakh crore. If implemented properly, securitization helps NBFCs to grow their business sustainably and control risks.
The RBI has introduced Scale-Based Regulation for NBFCs, where regulations are applied according to four levels. This ensures strict governance and risk management in the case of large NBFCs. In addition, regular inspections are being carried out to control risky loans and increase transparency. This system will keep the NBFC sector stable in the long term and help maintain parity with the banking sector.
The MSME sector is the mainstay of employment in India. Where banks often impose strict conditions, NBFCs provide loans on easy terms. Similarly, small traders and farmers in rural areas benefit from getting loans from NBFCs. It boosts the local economy and national growth. Therefore, NBFCs are playing a very important role in India's MSME and rural development.
The NBFC sector has several major challenges. These include a lack of governance, dependence on wholesale credit and strict regulations. In addition, competition from banks and fintechs is also increasing. NBFCs need to develop strong risk management and sustainable business models to meet these challenges. The NBFC sector will be stronger in the long run if reforms are done properly.
The RBI has already said that NBFCs with assets of more than ₹50,000 crore can be considered for bank licenses. However, this will require strict capital adequacy, governance and risk management conditions. It will create new opportunities for NBFCs, and the country's financial system will also be stronger. So, the possibility of transitioning from NBFCs to banks is real.
Fintech has given the NBFC sector a digital transformation. NBFCs are becoming much more efficient due to the use of data technology, fast loan approvals, and AI in risk assessment. For example, the speed of loan approvals has increased manifold on digital co-lending platforms. If NBFCs and fintechs work together, financial inclusion will increase, and more customers will be served easily in the future.
NBFCs are playing a strong role in India's growth, but they cannot achieve the goal alone. Banks, fintech, government policies and investments are equally important. NBFCs are essentially facilitating access to credit, which is the driving force of the economy. Therefore, NBFCs are the central pillar of this dream; it is not possible to achieve the goal without the cooperation of other sectors.
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