Data from the RBI showed that in May 2025, bank credit to NBFCs fell by 0.3% year-on-year (y-o-y) to ₹15.63 trillion. In May 2024, loans to the sector rose 16% y-o-y. If loans to housing finance companies and public financial institutions are excluded, growth in bank lending to NBFCs slowed to 3.6% in May from 7.2% in April.

Experts say this slowdown is because NBFCs are preferring to raise funds through bond markets. Yields on commercial papers have fallen by more than 100 basis points (or 1 percentage point) between March and April this year. According to experts, fundraising through corporate bond issuances during Q1 has touched an all-time high of ₹3 trillion.

However, the situation could reverse with banks cutting marginal cost of funds-based lending rate (MCLR), which refers to the rate that banks use to calculate lending rate. It is linked to the banks’ cost of funds–nearly 40% of bank loans are linked to MCLR. If banks reduce deposit rates, MCLR could also fall, making loans cheaper.

Jinay Gala, director at India Ratings & Research, felt that NBFCs would show sluggish growth in Q1. “Overall bank credit growth has fallen–stress in MFI (microfinance institutions) and fintech business loans has made banks cautious about lending,” Gala said. To be sure, overall banking system credit growth slowed to 9.8% y-o-y from 16.2% at the end of May.

MFIs and unsecured loan segments have seen a rise in delinquencies, pushing banks to slow credit to these segments.

“NBFCs are, therefore, looking at capital markets to raise funds,” Gala added. “Gold loans however have seen decent growth.”

According to rating agency Icra, credit growth for banks is estimated at 10.4-11.3% for FY26 as challenges in mobilising deposits and stress in the retail unsecured segment continue to weigh on growth.

Anil Gupta, vice-president for financial sector ratings at Icra said that bank credit is likely to be muted in Q1 due to delayed monetary transmission, but credit demand should improve in coming quarters due to the 50bps cut in repo rate in April. “Banks will also get the benefit of the deposit base being repriced downwards,” Gupta said. “CRR cut will also come in September.”

RBI

The CEO of an NBFC who spoke on condition of anonymity said that banks are now open to lending to NBFCs, even while pointing out that PSU banks are yet to pass on the rate cut to NBFCs as they have not cut the MCLR, while a few private sector banks have cut the MCLR.

“While delinquency in the NBFC sector may have peaked, impact would still remain for another two quarters, as many borrowers who took loans to roll over previous loans remain stuck,” this person said.

The background

The credit growth to the sector continues to decelerate despite the RBI restoring the risk weights on bank loans to NBFCs to 100% from the earlier 125% from 1 April. Since then, the credit to NBFCs has fallen by over 3%.

For perspective, RBI had increased the risk weight on bank exposures to NBFCs by 25 percentage points in November 2023 to prevent any buildup of stress in the unsecured loan books of banks and NBFCs.

This had resulted in the sharp fall in loan growth, contributing to a slowdown in total loan growth to the NBFC sector. According to RBI’s financial stability report of June 2025, bank lending to NBFCs slipped to 8.8% during the period September 2023 to March 2025 from 28.7% during September 2021 to September 2023.

Lower-rated NBFCs have been the worst hit due to asset quality stress, elevated funding cost, and slowdown in partnership and co-lending business, resulting in decline in pace of disbursements.

According to an India ratings report, A- and BBB-rated NBFCs mainly rely on banks and larger NBFCs for their funding needs, and funding from the capital markets, where the transmission of rates would be faster, is close to negligible.

The share of stressed assets of NBFCs (including NBFC-MFIs) increased from 3.9% in September 2024 to 5.9% in March 2025, according to RBI’s FSR (financial stability report) report for June.