21/07/2025, 19:15 Ionic Insights: How India’s NBFCs are Powering Credit Growth and Financial Inclusion
Ionic Insights: How India’s NBFCs are
Powering Credit Growth and Financial
Inclusion
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Published Jul 21, 2025
India’s NBFC ecosystem has quietly transformed from acting as niche financiers to
vital pillars of the country’s financial system With their rising market share, deeper
penetration into underserved segments, and agility in adopting technology, NBFCs
are now scripting a new chapter in India’s credit evolution.
"Through their innovative, flexible lending models and customer-centric approach,
NBFCs are bridging the persistent credit gap, providing timely and tailored financial
solutions that empower small businesses, rural entrepreneurs, and individuals. In
doing so, they are not only democratizing access to credit but also driving inclusive
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growth, fostering economic participation, and transforming lives across the
country" Says VP Nandakumar, CEO, Manappuram Finance.
This blog explores the sector’s growth trajectory, structural drivers, asset-wise
performance, financial health, and its role in enhancing financial inclusion.
The Role of NBFCs in India’s Financial Ecosystem
NBFCs have emerged as major lenders to retail borrowers, MSMEs, and informal
sector participants - segments often underserved by traditional banks. Their
importance is growing:
NBFC credit to GDP has increased to 26% in FY25, up from ~22% in FY19.
Source: CRISIL Intelligence
NBFC/ HFC share in overall systemic credit has risen from 19% in FY20 to 21% in
FY25, having higher share than commercial papers, external borrowings in systematic
credit.
Growth Trajectory of NBFCs
NBFCs Continue to Outpace Banks in Credit Growth
Over FY20–FY25, NBFCs recorded a credit CAGR of 13.9%, outperforming banks at
11.4%. Total NBFC credit reached ₹48 trillion in FY25 and is projected to hit Rs 74-
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77 Trillion by FY28, implying a 15-17% CAGR, exceeding the historical 11-13%. The
growth outlook for FY2025-26 remains positive for these sectors, with NBFCs
expected to significantly outperform traditional lenders, especially in Consumer and
SME-focused financial products.
Segment driving NBFCs credit growth (FY25-26 Outlook):
NBFC agility, customer-centric models, and strong rural/urban reach continue to
give them a competitive edge, particularly in underserved markets. Areas where
NBFCs are expected to grow faster than overall credit:
MSME Loans: 27-29% (9% faster than Banks)
Housing Loans: 15-16% (2% faster)
Personal Loans: 22-24% (6% faster)
Consumer Durable Loans: 20-22% (2% faster)
Given a large and underpenetrated credit gap, combined with deep rural reach of
NBFCs and formalization of underwriting data via GST, the MSME lending is
expected to see a significant growth shift.
Why are NBFCs outpacing Banks?
NBFCs gaining market share in financial assets is a global phenomenon post the
Subprime Financial Crisis of 2008, as evidenced in the chart below:
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In India, NBFCs continue to outgrow Banking credit as well as nominal GDP growth
rate, driven by their ability to cater to underserved, niche segments and the
supportive macroeconomic and policy environment. Factors like formalization of
the economy post GST implementation, growing working population, and
increasing digital adoption are all propelling demand for credit, providing a
substantial growth trajectory for NBFCs.
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1. Formalization of the Economy: India’s formalization process, including efforts like GST
implementation and digitization, has been a key enabler for NBFCs in driving retail
credit. As the economy formalizes, more businesses and consumers come under the
radar for credit access, resulting in a larger market share for NBFCs.
2. Growing Working Population and Disposable Income: Increasing disposable income
among the growing middle class directly correlates with the growing retail credit market,
which has seen significant growth in segments like consumer durables and auto loans.
3. Urbanization and Rising Urban Incomes: With over 34% of India’s population now
residing in urban areas, urban demand for retail loans is on the rise. The rapid
urbanization, aided by India’s ongoing infrastructure push, is making credit more
accessible and essential, driving further demand for NBFC products.
4. Increasing Digital Adoption: The penetration of mobile banking apps has facilitated
the ease of loan applications and repayments, enabling NBFCs to leverage these
platforms for faster decision-making and better customer reach.
5. Financial Inclusion: As financial inclusion improves, NBFCs benefit from access to a
larger pool of customers with traditionally limited access to credit.
6. Agility and Niche Focus of NBFCs: NBFCs are more agile compared to banks, with
shorter turnaround times and more localized services. This is especially true in
underserved and niche markets.
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Their agility, niche focus, and strong financial inclusion drive give them a
competitive advantage in a rapidly evolving credit market, enabling them to
outperform across multiple sectors and capture the lion’s share of the retail credit
market.
Why investors should not ignore the NBFC segment
Apart from higher expected growth, key metrics that drive investment returns are
seen improving for the NBFC space:
NPAs have reduced substantially
Net Interest Margins (NIMs) and ROAs are improving
Well capitalized for growth with ~26% Capital buffers (CRAR)
India’s NBFC sector remains fundamentally strong, supported by robust capital
buffers, healthy interest margins, and stable earnings, with low levels of asset
impairment. While loan growth experienced a temporary moderation due to tighter
regulatory norms.
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RBI is now guiding for better stability and growth too! Recently, RBI has
restored lower risk weights for NBFCs and with an easing in financial conditions,
the credit environment is expected to improve, paving the way for a revival in
lending momentum and sustained sectoral stability.
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The Impact of Rate Cuts on NBFCs: A Structural Tailwind
India's Non-Banking Financial Companies (NBFCs), with a substantial portion of
their borrowings linked to floating rates (primarily MCLR), are structurally positioned
to benefit from the RBI’s recent rate-cut cycle as their borrowing gets repriced at a
lower interest rate after the rate cut. According to Muthoot Finance, the full
transmission of lower funding costs is expected to reflect meaningfully from the
second half of FY25, as older borrowings reset and new issuances get priced at
lower yields.
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Further validating this trend, the RBI’s June 2025 Financial Stability Report noted
that yields on 3-year AAA-rated NBFC papers have declined by 65 basis points
between December 2024 and June 10, 2025. This sharp decline in borrowing costs
underscores the effective pass-through of monetary easing into NBFC funding
markets, supporting margin expansion, profitability, and enhanced credit availability
to underserved segments.
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Conclusion: Outpacing the Industry and Shaping India’s Financial Future
India’s Non-Banking Financial Companies (NBFCs) have established themselves
as key players in the country’s credit ecosystem. With their deep penetration into
underserved markets, strong customer-centric models, and relentless pursuit of
innovation, NBFCs are not only outpacing traditional banking growth but also
driving the future of financial inclusion. NBFCs have demonstrated their ability to
capture market share and meet the evolving credit demands of India’s diverse
population.
Their unique ability to address niche markets, backed by the growing formalization
of the economy, digital adoption, and favorable government policies, positions them
to maintain this momentum. NBFCs will remain pivotal to India’s journey towards
becoming a fully inclusive, credit-driven economy.
As we look to the future, NBFCs are poised to maintain their growth trajectory,
solidifying their place as the backbone of India’s credit market and driving sustained
financial inclusion across the country.
Disclaimer: This content is intended for informational purposes only and does not
constitute an offer or solicitation for investing in any products distributed by or
services made available by Angel One Wealth Limited and Angel One Investment
Services Private Limited (collectively referred to as “Ionic Wealth”) or any of their
affiliates. It is not intended to be, and should not be construed as, advertising or
promotional material. The information provided does not constitute investment
advice or a recommendation. You are advised to conduct your own due diligence
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and consult with its legal, tax and financial advisors before making any investment
decisions.
Angel One Investment Services Private Limited, is an AMFI-registered Mutual Fund
Distributor (ARN 306165). Note that investments in mutual funds and in the
securities market are subject to market risks. Read all the investment-related
documents carefully before investing.
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