The term shadow banks, once used categorically with reference to India's non-banking financial companies, has now become obsolete. NFBCs have emerged into the full glare of regulatory oversight, with stronger governance frameworks and systemic importance that rivals the traditional banking sector. This transformation is primarily driven by evolving market dynamics, funding constraints, and the slow yet inevitable march toward sustainable finance.
India’s NBFCs: Built for Adaptability
In the wake of the 2018 crisis, India's NBFC sector has demonstrated remarkable resilience. Gross non-performing assets have plummeted from 6.4% in March 2021 to a mere 3% by March 2025, while profitability metrics have soared – with return on assets climbing from 1.11% to 2.4% – over the same period. The sector's loan book has doubled to Rs 48 lakh crore, representing 24% of commercial bank credit disbursements.
Beneath this veneer of recovery lies a more complex narrative. Bank credit to NBFCs has contracted by 0.3% year-on-year to Rs 15.63 trillion in May 2025, a stark contrast to the robust 16% growth witnessed in May 2024. This credit squeeze has forced NBFCs to pivot toward bond markets, where they have raised an unprecedented Rs 3 trillion in the first quarter alone; a strong testimony to both their adaptability and the stress they face in traditional funding channels. The shift reflects a structural realignment rather than mere tactical maneuvering, as commercial paper yields have fallen by over 100 basis points between March and April, making capital market funding more attractive than bank loans.
Sustainable Models at the Forefront
It is precisely at this juncture that the imperative need for sustainable business models becomes not just desirable but existential. A sustainable business model must be the cornerstone of the sector's growth, and at the heart of a sustainable credit landscape lies a financially aware and literate customer. The old and disreputable avenues of aggressive lending, predatory practices, and exploitation of fiscal illiteracy must give way to more transparent and benevolent financial approaches. As Finance Minister Nirmala Sitharaman observed, financial inclusion cannot be used as a pretext for "financial exploitation." This is not merely about regulatory compliance but about building long-term stakeholder value in an increasingly sophisticated market.
The most profound challenge and opportunity lies in aligning this transformation with India's environmental and social imperatives. Green lending represents not just a moral imperative but a commercial opportunity that could redefine the sector's trajectory. As India commits to net-zero emissions by 2070, the demand for green finance will explode exponentially. NBFCs, with their agility and customer proximity, are uniquely positioned to capitalize on this opportunity – from renewable energy projects to electric vehicle financing, from green housing to sustainable agriculture.
The recent aggressive rate cuts by the RBI, including the 50 basis points repo rate reduction in April, create a conducive environment for this green transition. As funding costs decline and monetary transmission improves, NBFCs have the space to develop innovative green products without compromising profitability. However, this requires a fundamental shift in organizational DNA, from short-term profit maximization to long-term value creation.
Tech Meets Purpose: Building a Sustainable Digital NBFC Sector
The technological imperative looms large in this transformation narrative. Technology must be a central pillar of the transformation, with NBFCs aiming for the complete adoption of digital processes across the entire loan lifecycle. The development of minimum common technology standards for all registered NBFCs is a necessity for interoperability, efficiency, and risk management. Data-driven decision-making must replace intuition-based lending, particularly as the sector navigates the complexities of microfinance stress and unsecured loan delinquencies that have made traditional banks increasingly cautious.
Synergies Between NBFCs and Banks Paving the Path
Deep collaboration between NBFCs and banks, specifically through co-lending arrangements, have already demonstrated their efficacy in reaching underserved segments while optimizing risk distribution. The synergy between traditional banking infrastructure and NBFC innovation creates a multiplier effect that benefits the entire financial ecosystem. Sitharaman's vision of 20% of NBFC lending occurring through collaborative frameworks with banks represents a fundamental shift toward integrated financial services delivery.
The Road to Sustainable Profits
The human dimension of this transformation cannot be overlooked. Sitharaman's reminder that loan recovery "is part of your duty, but it's not part of your duty to be heartless" indicates a broader philosophical shift toward ethical finance. The push for growth should not come at the expense of customer wellbeing. This ethos must permeate every aspect of NBFC operations, from product design to collection practices.
As we look toward 2047 and India's Viksit Bharat aspirations, the role of NBFCs becomes increasingly critical. They must evolve from mere credit intermediaries to partners in India's sustainable development journey. The sector that once operated in shadows now has the opportunity to illuminate the path toward a more inclusive, sustainable, and technologically advanced financial ecosystem. NBFCs can now be profitable, efficient, and innovative, while simultaneously being purposeful, ethical, and inclusive – their choices made today, can shape India’s financial landscape for decades to come.
