Rising Credit Exposure of Banks to Non-Banking Financial Companies

Why Banks Are Pouring Money into NBFCs—and Why It Matters to You

Let’s face it—terms like “bank exposure to NBFCs” don’t exactly scream excitement. But if you've ever applied for a car loan, run a small business, or parked your savings in a mutual fund, this isn't just financial background noise. It affects you more than you might think.

The Quiet Boom You Didn't Notice

In July 2023, Indian banks' lending to non-banking financial companies (NBFCs) hit a staggering ₹13.8 lakh crore—a 23.6% rise over the previous year. That’s nearly 10% of all bank lending, making NBFCs one of the biggest borrowers in the system today.

1. The Post-COVID Lending Revival

As the economy bounced back post-pandemic, demand for credit soared—from housing to vehicle finance to working capital. NBFCs, often more nimble than traditional banks, rushed in to meet that demand. But to lend, they needed capital—and banks stepped in as their main funding source.

2. The HDFC Effect

The July merger of HDFC Ltd with HDFC Bank briefly distorted the data (NBFC borrowing dipped 3.3% that month), but the broader trend remained intact. The market absorbed the disruption—and moved on.

Not Just Banks—Mutual Funds Are Back Too

It’s not just the banks that are playing lender. Mutual funds are stepping back into NBFC debt as well—and in a big way.

₹1.81 lakh crore was invested in NBFC debt in July 2023—a 60% year-on-year jump.
Investments in Commercial Papers (CPs) issued by NBFCs crossed ₹1 lakh crore for the first time since 2019.
Mutual funds’ share in NBFC debt grew from 10.1% to 13.1% in just one year—suggesting a cautious but visible return of confidence.

Who’s Getting the Money?

Larger NBFCs are accessing capital markets directly. But smaller NBFCs—the ones financing MSMEs, auto loans, and rural credit—still rely heavily on bank lines of credit. It’s a two-tier system, and both tiers are growing.

The Rise of Securitisation: Quiet but Powerful

You might not hear much about it, but NBFCs and housing finance companies (HFCs) are actively using securitisation to raise funds. In the June quarter alone, they sold over ₹55,000 crore worth of loan portfolios to investors.

Securitisation helps NBFCs recycle capital—selling existing loans so they can lend again, without waiting for repayments.

So What’s Changed Since 2018?

After the IL&FS crisis, mutual funds grew cautious—cutting NBFC exposure by 21.7% over five years. But banks doubled down, increasing their exposure 3.5 times in the same period.

Banks’ share of NBFC funding has doubled since 2018.
Mutual funds, meanwhile, continue to hover at around 10% exposure of their debt assets in NBFCs—up from last year, but still cautious.

Corporate Bonds and Commercial Papers: The Other Lifelines

Corporate bond exposure to NBFCs grew to ₹76,000 crore—but as a share of total corporate debt, it actually slipped from 4.1% to 4%.
On the flip side, short-term CP investments exploded—up 87% year-on-year to over ₹1.05 lakh crore. Investors seem more comfortable with short-duration risk, especially in a volatile interest rate environment.

Why Should You Care?

If You're a Borrower:

This is good news. A well-funded NBFC sector means wider credit access—especially if you're not a salaried urban borrower. Whether you're looking to renovate your home, expand a kirana shop, or buy your first two-wheeler, NBFCs are often your best shot.

If You're an Investor:

Renewed participation by mutual funds and corporate lenders suggests confidence is returning—but it's still selective. Stick with well-rated NBFCs, and always watch liquidity and asset quality data.

For the Economy at Large:

A robust NBFC ecosystem helps keep credit flowing, especially to sectors that banks often overlook—rural borrowers, informal workers, first-time entrepreneurs. But the rising dependence on banks also means the RBI has to watch for systemic risks—something it’s already doing more aggressively post-IL&FS and DHFL.

A Real-World Chain Reaction

Picture this: a small logistics firm in Pune wants to scale after COVID. Their local NBFC funds the vehicle purchase. That NBFC, in turn, borrows from a public sector bank. Later, it sells a bundle of such loans as securitised paper to a mutual fund. That money goes into more loans for more small businesses.

Final Thought

At first glance, rising bank exposure to NBFCs may look like a niche statistic. But underneath it lies a broader story about India’s credit architecture, post-COVID recovery, and how modern finance really works.