Beyond banks: The new funding playbook for NBFCs

Banks continue to contribute nearly half of NBFC borrowings, underscoring systemic interlinkages within India’s credit ecosystem. While this interdependence has supported balance sheet expansion, it also heightens sensitivity to liquidity cycles and regulatory risk. Total bank exposure in the borrowing mix of NBFCs (UL + ML) stood at c. 42% as of March 2025, marginally lower than c. 43% in March 2024. This moderation signals the beginning of a structural rebalancing in NBFC liabilities. Credit growth for Scheduled Commercial Banks (SCBs) is consistently outpacing deposit growth. In FY24, loans and advances (credit) for SCBs rose 20%, while deposits grew only 14%, driving the CD ratio up from 69% in FY21 to 79% in FY24.

Strong balance sheets, high credit ratings, and strong governance make NBFC-ULs attractive to global lenders. Their advanced treasury operations and large FX teams allow them to manage currency risks and hedging costs more efficiently. The easing of ECB-related regulations—particularly the relaxation of end-use restrictions by the RBI—has further supported overseas borrowing. In its October 2025 MPC meeting, the RBI allowed NBFCs to raise up to USD 1 billion or 300% of net worth (whichever is higher) under the automatic route, replacing the earlier USD 750 million cap. NBFC-ULs, due to their strong ratings, scale, transparency, and robust infrastructure across legal, risk, FX, and compliance functions, can access overseas funds on favorable terms and better absorb hedging and currency-fluctuation risks. The regulator has also been explicitly encouraging them to tap capital markets, including external commercial borrowings.

Reduced concentration risk is making NBFCs less vulnerable to banking-sector disruptions. The RBI’s increase in risk weights for bank lending to top-rated NBFCs in Nov-23 encourages diversification away from bank funding, strengthening overall financial stability. Borrowing across international markets lowers country-specific risks and expands investor reach, enhancing brand visibility. Access to varied tenures helps reduce ALM mismatches, while capital-market instruments offer greater flexibility and often lower costs. Stronger governance frameworks arise from stringent disclosure norms, and securitization/DA provide on-tap liquidity with RoE-accretive and PSL benefits. Overall, disciplined liability management enhances liquidity resilience, reduces rollover risk, and strengthens long-term franchise stability.