Is India Doing Enough to Fuel NBFC Growth? According to RBI data, credit growth to NBFCs decelerated sharply to 7.8 per cent in November 2024, down from 19 per cent a year earlier.

Non-Banking Financial Companies (NBFCs) have long been the unsung workhorses of India's financial architecture. Often reaching where traditional banks don't, NBFCs serve as critical credit wires in semi-urban and rural regions, powering the country's micro, small and medium enterprises (MSMEs), informal sector, and climate-forward financing initiatives. Recognizing their indispensable role, the Indian government, alongside the Reserve Bank of India (RBI), has stepped up support in recent years. But is this support enough to ensure sustainable growth?

The intent is certainly visible. "Government understands the importance of credit in an economy like India, especially the underserved areas of the country," said Vivek Iyer, partner and financial services risk leader at Grant Thornton Bharat. "Hence, it focuses on creating an enabling environment through the regulator, which is the Reserve Bank of India, for a robust credit access environment through the NBFCs."

The RBI has shown flexibility and foresight, particularly during economic stress. Regulatory forbearance measures and discussions around liquidity backstop arrangements underscore the shift from reactive to proactive oversight. According to Iyer, "Due credit must also be given to the regulator for applying regulatory forbearances during times of stress...the government is doing the right amount for the NBFC ecosystem."

A defining moment came in early 2025 when the RBI reduced risk weights on bank exposures to well-rated NBFCs, a move widely seen as an effort to ease credit flows. "This marked a critical intervention aimed at improving systemic liquidity and easing access to funds," said Dhiraj Agrawal, CBO of Mufin Green Finance. This regulatory tweak is designed to incentivize banks to lend more actively to financially sound NBFCs, indirectly strengthening the broader credit chain.

Beyond regulatory nudges, government-backed institutions like SIDBI and NABARD continue to offer crucial refinancing support, especially to smaller NBFCs operating in last-mile geographies. These bodies serve as lifelines for non-bank lenders that extend credit to micro-entrepreneurs and rural households. Moreover, the expansion of the Credit Guarantee Scheme (CGS) has provided additional firepower, allowing NBFCs to tap into banking lines while mitigating perceived credit risks.

Yet, the numbers paint a more sobering picture. According to RBI data, credit growth to NBFCs decelerated sharply to 7.8 per cent in November 2024, down from 19 per cent a year earlier. This dip signals persistent liquidity constraints and a rising risk aversion, especially toward smaller or newer NBFCs without access to low-cost, long-term capital.

Agrawal warns that structural problems remain. "To fully realize the potential of NBFCs in driving inclusive growth, targeted reforms are now necessary." He advocates for a tiered regulatory approach, increased access to concessional and blended capital, particularly for green and impact-focused lenders, and the creation of long-term funding avenues like ESG-linked bonds and pooled finance structures. "NBFCs remain a vital pillar of India's financial ecosystem," he emphasized, calling for regulatory clarity and deeper capital access to sustain their momentum.

Deepak Aggarwal, co-founder, co-CEO & CFO of Moneyboxx Finance Limited, echoed similar sentiments. He credited the government for positive interventions such as the co-lending framework and the First Loss Default Guarantee (FLDG) structure. "These measures have improved credit flow in specific segments and encouraged collaboration between banks and NBFCs for deeper financial outreach," he said.

The FLDG, in particular, introduces a much-needed regulated mechanism for risk-sharing in digital lending—a space that has been both a frontier and a flashpoint for regulatory concern. Meanwhile, the co-lending framework has allowed NBFCs to leverage banks' balance sheets, creating a more structured risk-sharing ecosystem.

Still, as Deepak noted, "There is room for further support to help NBFCs scale their impact, especially those serving rural and semi-urban borrowers." While refinancing facilities exist, their scale and reach remain limited. He emphasized that NBFCs can only continue playing a meaningful role in financial inclusion if they are granted broader access to stable capital and more streamlined funding pathways.

As per a report by CareEdge Ratings, MSME lending has witnessed robust growth in recent years, with NBFCs emerging as the front-runners, outpacing the growth rates of both private and public sector banks. Between FY21 and FY24, NBFCs recorded a 32 per cent compound annual growth rate (CAGR) in MSME lending, albeit on a smaller base, compared to 20.9 per cent for private banks and 10.4 per cent for public sector banks. Read more