Bank Lending to NBFCs Surges 26% in FY26, Marking Record Growth

In the fiscal year ending March 2026, bank lending to non-banking finance companies (NBFCs) surged by an impressive 26%, marking a notable recovery in the sector. This growth was largely attributed to a relaxed regulatory environment fostered by the Reserve Bank of India (RBI), which had initially tightened measures to mitigate systemic risks between banks and NBFCs. The RBI’s decision in November 2023 to increase risk weights on bank loans to NBFCs played a significant role in reshaping the lending landscape, as this adjustment lowered the capital reserves required from banks, thereby stimulating a renewed willingness to lend. Sanjay Agarwal, senior director at Care Ratings, emphasized that the rise in bank lending follows a period of caution where banks were discouraged from lending to NBFCs due to heightened risk concerns.

The increasing interconnectedness between banks and NBFCs, coupled with elevated overseas interest rates and a significant drop in domestic bank lending rates, enabled a more favorable borrowing environment for NBFCs. As highlighted by Madan Sabnavis, chief economist at Bank of Baroda, the reallocation of funding away from traditional channels—such as obligations in the bond market and costly international loans—led to a marked decrease in the previous fiscal year, when bank credit growth to NBFCs stagnated at just 7%. In contrast, the latest figures showcase a robust increase in outstanding loans to NBFCs, which reached ₹20.7 lakh crore, surpassing the overall growth rate of bank credit, which stood at 16% during the same period.

Looking ahead, analysts predict that bank lending to NBFCs will continue to grow, albeit at a tempered pace due to ongoing macroeconomic uncertainties. The persisting high domestic bond yields and rising costs of foreign borrowings—exacerbated by currency volatility—are expected to drive NBFCs back to their primary funding source: bank loans. While this trend may foster a resilient lending environment, it remains contingent on how macroeconomic conditions unfold in the near future. Analysts, including Sabnavis, caution that while the growth trajectory remains strong, the pace may not replicate the significant surge seen in FY26 due to inherent economic risks.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)