Yet, NBFCs shine where banks hesitate. In rural areas, microfinance NBFCs have extended millions of small-scale loans, often to women with little or no collateral. These funds support activities like small scale dairy or tailoring, cultivating self-employment and economic resilience. NBFCs also help micro, small, and medium enterprises (MSMEs) that lack formal balance sheets or credit histories. They employ innovative underwriting methods such as cash flow analysis to disburse loans quickly. This flexibility is a lifeline for small businesses, which drives local economies and create jobs. Likewise, specialised NBFCs finance projects where banks may fear longer profit gestation periods such as infrastructure sector. Over time, NBFCs have proven pivotal in housing finance, consumer credit, vehicle loans, and most importantly in sectors traditionally underserved by banks.

But, as NBFCs grow, so does RBI scrutiny. They must register, meet minimum net owned fund requirements (currently at ₹10 crore), and maintain capital adequacy ratios. Setting a limit of ₹10 crore as minimum required funds to become a NBFC effectively hampers the progress of rural lending entities which do not command such funds, and yet are making a difference in their local economics by financing even small-scale self-employment projects (as discussed earlier) while also restricting financial inclusion in distant corners of the economy.

Larger NBFCs, or those determined to be systemically important, must adhere to robust risk management, governance, and auditing standards. They also face the Prompt Corrective Action (PCA) framework by the RBI if their financial health weakens, mirroring the regime banks face. Notwithstanding, these NBFCs lack low-cost public deposits, relying heavily on more expensive sources. To discourage over reliance on bank credit, RBI assigns higher risk weights when banks fund NBFCs heavily. While this guards against excessive leverage, it can limit credit flow to smaller NBFCs lacking strong ratings in debt markets. Coupled with the introduction of liquidity coverage ratios for large NBFCs, these measures raise costs, prompting lending to consolidate. Another restrictive regulation appears in the form of a ceiling for IPO funding. As the RBI assigns higher risk weights and banks consolidate their lending, IPOs are the only viable options for NBFCs to raise funds. Here too, they face a ceiling of ₹1 crore per borrower. IPOs are at times the only source of earnings for the majority of NBFCs which are non-deposit.

Compliance burdens also weigh on NBFCs. Implementing Indian Accounting Standards under the Accounting Standards Board which align with global standards of book keeping, forming multiple oversight committees, and meeting detailed reporting requirements demand significant resources. For smaller or rural focused NBFCs, these overheads can be prohibitive.

If regulatory framework continues to prefer scale over agility, the rich tapestry of localized financial services may soon lose the very diversity that has fueled inclusivity. Regulators need to carve out space where these smaller NBFCs can thrive, innovate, and continue to bridge the gap between traditional banking and the vast, untapped segments of the economy. If allowed less restrictive norms, NBFCs hold immense potential to drive India’s growth towards Viksit Bharat.

With Viksit Bharat 2047 in mind, the vision of India as a fully developed economy by the 100th year of Independence, we must talk about credit and financial empowerment for all citizens by that year. NBFCs are poised to be critical in realizing this vision. By 2047, India’s aspirations include a high per-capita income, world class infrastructure, and minimal poverty. Achieving these means massive investments at all levels of the economy and consequently ensuring credit access is no longer a barrier for any viable enterprise or individual dream. NBFCs can be a powerful economic multiplier in this journey. They will continue acting as the “last-mile financiers” for the underserved.

The democratisation of credit will underpin growth across sectors, ensuring that the fruits of development are widely shared. It aligns perfectly with the inclusive ethos of Viksit Bharat. The story of NBFCs is of an entrepreneurial spirit in finance, of taking calculated risks on the underdog borrower and often winning. A thriving NBFC sector alongside a strong banking sector will give India a twin-engine credit infrastructure, capable of powering an economy that is not only growing, but growing inclusively.

This article is authored by Shishir Priyadarshi, president, Chintan Research Foundation, New Delhi.