India’s financial system is undergoing a quiet yet significant transformation. While banks continue to anchor credit delivery, recent years have seen a marked shift towards non-bank financial channels — ranging from NBFC and corporate bonds to equity and foreign capital. Regulatory reforms, digital infrastructure, and changing borrower preferences are accelerating this trend, laying the groundwork for a more diversified and resilient credit ecosystem.

Credit flow from non-bank sources

Recent RBI data shows the total flow of resources to the corporate sector reached ₹35 lakh crore in FY25, a modest 3 per cent rise year-on-year. What stands out is the composition: nearly half (₹17.1 lakh crore, or 49 per cent) came from non-bank channels, including NBFC loans, corporate bonds, equity issuances, and foreign direct investment.

By contrast, bank credit demand declined by 14 per cent to ₹17.9 lakh crore. Companies turned instead to buoyant equity markets, raising ₹3.8 lakh crore through share issuances – a nearly three-fold jump over the previous year. Simultaneously, borrowings through corporate bonds and commercial papers rose 15 per cent, to ₹2.1 lakh crore.

This shift signals a maturing economy, in which firms are no longer singularly reliant on bank loans, but are drawing on a wider suite of funding avenues.

NBFCs: Expanding their role

Among alternative lenders, NBFCs have clearly stepped up, lending ₹6.1 lakh crore in FY25 — a 20 per cent increase year-on-year — solidifying their place as a vital financing channel. Their agility, reach into underserved segments, and ability to partner with digital platforms make them natural complements to banks.

For MSMEs, small entrepreneurs, and semi-urban borrowers, NBFCs often provide the first touchpoint of formal finance. Their flexibility in product design, local presence, and contextual understanding allow them to address credit gaps that banks may not prioritise.

In addition, many NBFCs are leveraging alternative data and AI-driven models to underwrite thin-file customers, expanding access to credit for those without extensive formal credit history. Digital distribution channels, automated risk scoring, and innovative product offerings such as micro-loans and flexible repayment solutions are enabling faster, more tailored lending while maintaining prudent credit practices.

Diversification of NBFC funding sources

To sustain this role, NBFCs have been diversifying their own funding sources. While bank borrowings remain significant, NBFCs are increasingly tapping corporate bond markets, securitisation, external borrowings, and co-lending partnerships with fintechs and banks.

Innovations such as first-loss default guarantees, retail participation in loan pools, and API-led digital co-lending are enabling NBFCs to access cheaper, more resilient funding channels. This diversification not only strengthens their balance sheets but also ensures that credit delivery remains steady even during banking sector slowdowns.

A major regulatory boost came from the rollback of higher risk weights on bank lending to NBFCs, which had earlier increased their borrowing costs. The RBI’s decision has eased liquidity access, lowered cost of funds, and allowed NBFCs to expand their lending portfolios at more competitive rates.

This move acknowledges NBFCs’ systemic importance and reinforces their ability to serve critical segments like MSMEs, affordable housing, and consumer credit. For borrowers, the impact is visible in better pricing and improved availability of credit.

Looking ahead, the RBI’s open tap bank licensing policy is another reform with far-reaching implications. By allowing continuous applications for new bank licenses, the Central bank is encouraging the entry of specialized players — from small finance banks to digital-first banks.

This will expand competition, spur innovation, and create new avenues for collaboration between banks, NBFCs, and fintech platforms. In turn, it will broaden credit delivery channels, making the system more diverse and resilient.

Embedded finance: The forward edge

While the dominant trend is the rise of non-bank credit flows, embedded finance is emerging as a forward-looking extension. By integrating lending directly into platforms such as e-commerce, logistics, mobility, and government-backed digital frameworks, embedded finance complements NBFCs’ physical networks.

Examples are already visible: Travel insurance embedded into IRCTC ticketing, UPI payments embedded into everyday commerce, ONDC integrating credit and insurance access for small sellers, Account Aggregator enabling consent-driven credit access for individuals and MSMEs.

For NBFCs, embedded finance represents a way to combine branch-led trust with digital efficiency, unlocking access to new borrower segments, reducing friction, and scaling faster.

The increasing flow of resources from non-bank channels, the rising role of NBFCs, their diversification of funding sources, and regulatory measures such as the rollback of risk weights and open tap licensing together mark a decisive phase in India’s credit evolution.

Embedded finance, layered on top of these developments, has the potential to push this transformation further by making credit contextual, accessible, and seamless.

If the previous decades were about expanding banking penetration, the next phase will be about broadening and diversifying credit flows — where banks, NBFCs, capital markets, and embedded digital models all work in tandem to serve India’s growing economy.

Published on September 29, 2025