Bank Lending to NBFCs Rises 26%, Fastest in FY26

Softer Reserve Bank of India (RBI) regulations, higher overseas rates, and a sharp fall in bank lending rates also brought NBFCs closer to borrowing from banks. As a result, bank lending to NBFCs was the fastest growing in FY26.

“The rise in bank lending to NBFC came on the back of a quiet fiscal before that, when RBI tightened regulations and generally discouraged banks from lending to NBFCs because the regulator was worried about the risks building up due to the interconnectedness of these two sectors,” said Sanjay Agarwal, senior director, Care Ratings.

“Those risks abated in the last fiscal leading to banks again warming up to NBFCs,” he said.

In November 2023, RBI increased risk weights on bank loans to NBFCs by 25 percentage points over and above the risk weight given by the external rating agency, in cases where the risk weight as per external rating of NBFCs is below 100%. Risk weights on consumer loans from banks as well as NBFCs were also increased making it more expensive for lenders to offer loans in these segments and which could likely mean higher interest rates for borrowers.

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Risk weights means the amount of capital lenders have to keep aside to cover for credit risk from a particular loan segment. Higher a risk weightage, more amount of capital needed to set aside by lenders for the loans.

The RBI also wanted NBFCs to diversify their funding sources as bank lending to this sector became a disproportionate part of NBFC borrowing increasing systemic risks.”So NBFCs looked toward the bond market and also the international loan market during that year which slowed down bank credit growth to the sector,” said Madan Sabnavis, chief economist at Bank of Baroda.

As a result bank lending to NBFCs grew just 7% in the fiscal ended March 2025 to ₹16.4 lakh crore from ₹15.2 lakh crore a year ago. The latest data shows that total outstanding loans to NBFCs have increased to ₹20.7 lakh crore at the end of March 2026 up 26% and quicker than the 16% overall bank credit growth.

Bank lending to NBFCs will remain one of the fastest growing sectors this year as higher domestic bond yields and expensive foreign borrowings due to global uncertainties will force NBFCs to borrow from their primary funding source, analysts said.

“Bond yields have risen and with the volatility in the rupee, higher hedging costs make overseas borrowings more expensive. But lending for both banks and NBFCs may not be at the pace seen last fiscal due to the macro economic uncertainties which means bank lending to the sector may also temper a bit,” said Sabnavis from Bank of Baroda.