A new report by Mavenark Advisors has revealed that Non-Banking Financial Companies (NBFCs) have consistently outpaced India’s GDP growth over the years, showcasing their vital role in the Indian financial ecosystem. The report, which spans data from FY19 to FY24, highlights that credit growth by NBFCs during this period has increased at a compounded annual growth rate (CAGR) of 12%, exceeding the rate of India’s overall economic growth.

NBFCs have witnessed a massive expansion in their assets under management (AUM). In the early 2000s, their total AUM stood at less than ₹2,00,000 crore (approximately US$ 23.74 billion). By the end of FY24, this figure had surged to an impressive ₹43,00,000 crore (around US$ 510.39 billion), signifying not just growth in size but also in influence across India’s financing landscape.

NBFCs vs. Traditional Banks: A Sectoral Shift

One of the key findings of the Mavenark report is the difference in lending patterns between NBFCs and traditional banks. While banks predominantly focus on lending to large corporates, as well as the services and agriculture sectors, NBFCs have shifted their strategy to focus heavily on retail lending. In FY24, 48% of total NBFC credit was directed toward the retail segment, a stark contrast to the 34% of retail credit disbursed by banks during the same period.

This movement toward retail finance reflects a strategic pivot by NBFCs to capture consumer finance opportunities, especially in the backdrop of rising domestic demand, increased economic activity post-COVID, and a renewed push for digital financial services.

Financial Inclusion: NBFCs at the Grassroots

Perhaps the most transformative role played by NBFCs is in the area of financial inclusion. These entities are deeply entrenched in semi-urban and rural India, often serving populations that remain unbanked or underbanked. Their ability to provide customized lending solutions for people without formal credit histories, such as daily wage earners, micro-entrepreneurs, and informal sector workers, sets them apart from mainstream banking channels.

NBFCs are known to take higher risks in lending to low-income or new-to-credit borrowers, and in doing so, they bridge a critical gap in India’s financial system. They serve not only as lenders of last resort for many, but also as agents of economic empowerment, enabling small-ticket loans that can catalyze personal growth and local entrepreneurship.

This aligns well with the Government of India’s broader financial inclusion goals, including initiatives such as PM Jan Dhan Yojana, Digital India, and Make in India, all of which require accessible credit at the grassroots level.

Future Outlook for FY25 and Beyond

Looking ahead to FY25, the report forecasts continued robust growth in the NBFC sector. Several macroeconomic and policy-level factors are expected to support this momentum:

1. Revival of the Indian economy, post-pandemic, driven by consumption and investment.

2. Increased consumer demand across sectors like housing, education, consumer durables, and two-wheeler financing.

3. Government-backed schemes and policy support, which facilitate last-mile credit delivery via NBFCs.

4. Digitisation and fintech integration, making NBFC operations more efficient, scalable, and customer-friendly.

In particular, digitally agile NBFCs that leverage technologies such as AI-based credit scoring, eKYC, and digital loan disbursement will likely gain greater market share in the coming years.

Risks and Regulatory Considerations

However, the rapid growth of NBFCs is not without challenges. The sector has historically faced issues around:

• Asset-liability mismatches (ALM)

• Liquidity crises, as seen during the IL&FS and DHFL episodes

• Higher non-performing assets (NPAs) compared to banks

• Limited access to low-cost funding

Regulatory bodies, especially the Reserve Bank of India (RBI), have been increasingly focused on ensuring robust governance frameworks for NBFCs. Recent steps include:

• Implementation of a scale-based regulatory framework.

• Emphasis on risk-based internal audits.

• Requirements for higher capital adequacy norms and liquidity buffers.

These measures aim to strike a balance between enabling growth and maintaining systemic stability. For NBFCs to sustain their momentum, strong risk management practices and transparent corporate governance will be essential.

Segment-Wise Growth: Key NBFC Categories

The report also points to growth variations across different types of NBFCs:

• Asset Finance Companies (AFCs): Strong performance in vehicle and equipment finance.

• Microfinance NBFCs (NBFC-MFIs): Expanding reach in rural Bharat with small-ticket group loans.

• Housing Finance NBFCs: Capitalizing on affordable housing push.

• NBFC-Infrastructure Finance Companies (NBFC-IFCs): Limited growth due to higher risks and longer gestation projects.

Conclusion

In conclusion, NBFCs have emerged as key players in India’s evolving financial landscape, outpacing GDP growth, penetrating underserved markets, and driving inclusive credit access. Their unique positioning at the intersection of formal finance and informal needs makes them indispensable to India’s development goals.

With the right mix of policy support, tech adoption, and regulatory discipline, NBFCs are poised to continue their high-growth trajectory in FY25 and beyond.

The Upcoming IPOs in this week and coming weeks are Virtual Galaxy Infotech.

The Current active IPO are Srigee DLM, Manoj Jewellers, Wagons Learning, Kenrik Industries.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX.

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst.