NBFC Credit Enters New Growth Phase, RBI Warns Against Weakening Safeguards

Mumbai witnessed the RBI Deputy Governor Murmu's address at the 7th CII NBFC and HFC Summit. He highlighted that NBFCs and HFCs have transcended their traditional role as alternative lenders. They now function as specialized financial institutions, catering to remote areas, underserved borrowers, and niche markets. Murmu emphasized that while NBFCs and HFCs have a significant opportunity to deepen credit, growth must not compromise on lending standards, governance, or customer protection.

The Deputy Governor reported that NBFC credit has surged to 16.7 percent of nominal GDP, up from 15.9 percent a year earlier. This credit volume represents 27 percent of the credit extended by scheduled commercial banks, up from the previous 26 percent. This growth points to a gap that NBFCs and HFCs can exploit, especially in meeting the unmet demand for MSME credit.

The Deputy Governor encouraged the use of India's digital public infrastructure, including Aadhaar, UPI, Account Aggregators, and the Unified Lending Interface, to lower borrowing costs and expedite disbursements. This digital shift can also help reduce dependence on physical collateral, enabling NBFCs and HFCs to serve MSMEs, microfinance customers, and borrowers in remote areas more effectively.

Further, Murmu suggested that NBFCs and HFCs' expertise in affordable housing, vehicle finance, infrastructure debt, and supply-chain finance can be leveraged to offer tailored products and sharper risk assessments. Co-lending with banks can further extend their reach.

However, Murmu cautioned that past liquidity shocks have exposed weak asset management, reliance on short-term wholesale funding, and vulnerabilities stemming from links with the financial system. Therefore, boards and senior management must promote compliance and ethical cultures. To navigate these challenges, NBFCs and HFCs should diversify funding sources, strengthen liquidity management, and utilize securitisation for risk transfer and capital release.

As lending accelerates, the Deputy Governor urged these institutions to deploy rigorous stress tests, early-warning systems, and dynamic provisioning. He also pointed out that artificial intelligence and machine learning can aid in detecting signs of borrower stress, yet stressed that credit standards must not be compromised in the pursuit of growth.

The RBI Deputy Governor underscored that customer trust must be at the forefront as innovation accelerates in the NBFC and HFC sectors. He stressed on the importance of responsible lending, fair recovery practices, and effective grievance redressal, especially for vulnerable borrowers. Strengthening cyber resilience and data protection measures as the sector adopts AI, blockchain, and other digital tools is also crucial.

The RBI will continue to support responsible innovation through proportionate regulation while ensuring financial stability, Murmu concluded.