Bajaj Finance to Muthoot Finance: NBFCs outpace banks once again

Retail NBFCs like Bajaj Finance, Muthoot and Shriram Finance are expanding faster than banks, led by strong demand in gold loans, vehicles and housing finance, analysts say

Non-banking financial companies (NBFCs) such as Bajaj Finance, Shriram Finance, Muthoot Finance, and IIFL Finance have regained their growth momentum after losing market share to banks in the post-Covid period. 

The growth surge is being led by diversified lenders and gold-loan companies while development-finance institutions such as Power Finance Corporation (PFC), REC, and Housing & Urban Development Corporation (Hudco) continue to grow at a slower pace. 

The combined loan books or advances by retail NBFCs were up 16.6 per cent year-on-year (Y-o-Y) during April-September (H1FY26) compared to 11.7 per cent Y-o-Y growth for all listed commercial banks during the period. 

Retail NBFCs’ faster growth in the first half of FY26 came on the back of a market beating 16 per cent Y-o-Y growth in FY25. In comparison, banks’ combined loan books were up by 11.5 per cent Y-o-Y in FY25. With this retail NBFCs have grown faster than banks for the fourth year in a row, recouping some of the market share they had lost to banks in the post-pandemic period. (See the adjoining charts.) 

Retail NBFCs’ combined loan books had expanded at a compound annual growth rate (CAGR) of just 4.5 per cent during FY19 to FY22 compared to 8.7 per cent for commercial banks. 

Government-owned development finance institutions (DFIs) such as PFC, Hudco, REC, and Indian Railways Finance Corporation (IRFC) reported a slowdown in loan disbursement in recent years after a burst of growth during FY17 to FY21. 

The combined loan books of DFIs were up just 8.6 per cent Y-o-Y in H1FY26, decelerating from 10.4 per cent Y-o-Y growth in FY24 and FY25. For comparison, DFIs’ combined loan books had expanded at a CAGR of 20.2 per cent between FY17 and FY21, double the pace of growth of banks during the period. 

DFIs’ combined loan books grew to ₹17.4 trillion at the end of September this year from ₹16.81 trillion at the end of March this year and ₹15.23 trillion at the end of March 2024. 

The last two years have also been tough for microfinance lenders such as Spandana Sphoorty Financial, Muthoot Microfinance, Indostar Capital Finance, and Arman Financial Services. These lenders reported a Y-o-Y decline in their loan books both in FY25 and in H1FY26. Some other lenders that shrank their loan books in H1FY26 include Sammaan Capital and JM Financial. 

Among top NBFCs, gold-loan firms such as Muthoot Finance and IIFL Finance grew the fastest with 42 per cent and 34.5 per cent Y-o-Y growth, respectively, in H1FY26. In comparison, in the case of Bajaj Finance, the largest NBFC, loan books were up 23.1 per cent Y-o-Y in H1FY26 while LIC Housing Finance, the second-largest, loan books were up just 6.2 per cent Y-o-Y in H1FY26. 

Though faster loan growth in recent years has enabled NBFCs to recoup some of the market share that they lost to banks in the past, their share in the overall lending pie is still lower than the historic highs. The NBFCs’ share of credit in the economy grew to 18 per cent in FY25 from 17.7 per cent in FY24 but remains lower than their record high share of 19.7 per cent in FY20. 

Analysts expect NBFCs to maintain their growth momentum in the near term, allowing them to grab a bigger share of the loan pie from banks. 

“Assets under management (AUM) of NBFCs will grow a steady 18-19 per cent this (financial year) and the next, driven by whetted consumption demand, and cross the ₹50 (trillion) mark by March 2027,” write Krishnan Sitaraman, chief ratings officer, Crisil Ratings. 

According to Crisil, growth will be driven by vehicle financing and home loans while gold loans are likely to continue to outperform other asset classes, driven by increased formalisation and higher gold prices.