Indian NBFCs have long been a cornerstone of financial inclusion, bridging the credit gap for unserved and underserved sectors. The past year has been a transformative one. Rising interest rates, liquidity constraints, increased regulatory scrutiny, and sectoral consolidation pushed the NBFC sector to an inflection point. However, the sector remained resilient despite strong headwinds. The firms that could keep innovation alive, embrace technology, and strengthen governance are and will emerge stronger. The road ahead will be defined by strong governance, strategic agility, customer-centricity via the use of technology and data, and sustainable growth.
The Challenges So Far:
The Tightrope Walk of Liquidity and the Cost of Funds: With the Reserve Bank of India (RBI) holding the repo rate steady for nine consecutive quarters, the borrowing rates remained high, and somewhat impacted profitability across the industry. However, the recent repo rate cut by the RBI is expected to ease funding costs, providing much-needed relief. For Non-Banking Financial Companies (NBFCs), access to capital at the right cost is crucial for sustaining growth and maintaining competitive lending rates, making this policy change a significant development.
Going forward, it is primary for NBFCs to focus on capital efficiency, maintaining strong lender relationships, and optimizing their funding mix to navigate the evolving landscape. Securitisation, external commercial borrowings (ECBs), capital markets, and structured debt instruments will also become essential instruments for long term funding and sustainability.
Navigating the Credit Cycle: The economic headwinds and muted consumption have impacted credit quality across the industry. Despite these challenges, NBFCs that have adopted a data-driven approach have been quicker to respond and adapt. At NeoGrowth, we have proactively strengthened our collections and recovery mechanisms while implementing AI-driven credit assessment models. Additionally, enhanced early warning systems to predict and manage potential defaults have become crucial for maintaining credit discipline and ensuring business continuity.
The Road Ahead
Embracing Smarter Lending Practices: The future of NBFCs lies in leveraging technology to enhance underwriting and risk assessment practices. AI/ML-powered credit models, cash flow-based lending, and automated collections will also play a crucial role in improving efficiency and reducing defaults. Digital-first lending models, backed by real-time data analytics, will allow fintech NBFCs to serve customers faster while improving efficiency.
The $1 Trillion Opportunity: MSMEs remain a critical growth engine for the Indian economy, as it is projected to grow to $1Tn by 2028. Yet, the credit gap in the MSME sector is estimated to be $ 530 Bn, and ~14% of 63Mn small businesses have access to credit. The traditional banking system often fail to address the unique needs of small businesses due to their collateral-based lending models. The lack of formal financial documentation or credit history for the rural population in the underserved areas also limits access to affordable credit for many and drives them towards private moneylenders, who charge exorbitant interest rates.
NBFCs still have enough opportunity to bridge this gap by offering customised financing solutions. This can be done by adopting alternative credit assessment techniques that rely on transaction data, GST records, and even digital payment history.
Hyper-personalisation will be the future of lending that will not only enhance credit accessibility but also contribute to long-term economic growth.
Diversified Borrowing Strategies
There is also a rising need for NBFCs to rethink borrowing strategies to ensure business sustainability. Additionally, transparent governance and efficient risk management practices will be key to strengthening investor confidence. Institutions that can build a well-balanced funding mix will always be a step ahead in mitigating liquidity risks and maintaining steady growth in the long run.
Also Read: The Future of Banking: Data-Driven Innovation and Value Creation
The past year tested the resilience of the sector, but it has also paved the way for a sustainable lending ecosystem. The next phase of growth will be shaped by stronger governance, operational resilience, and data-driven decision-making. As the NBFC sector stands at a crossroads, the challenges ahead also present opportunities for growth.
Views Expressed By:- Arun Kumar Nayyar, Managing Director & CEO, NeoGrowth
