Do NBFCs need a bank licence to grow, or is it overrated now for scale?

As regulations converge and funding widens, NBFCs say the appeal of becoming a bank is fading - but their role in last-mile credit delivery is only getting stronger

The gap between banks and non-banking financial companies (NBFCs) has narrowed, with both now operating under similar governance and regulatory standards. At a panel discussion at the Business Standard BFSI Insight Summit 2025, industry leaders — Raul Rebello, managing director (MD) & chief executive officer (CEO), Mahindra Finance; Jairam Sridharan, MD & CEO, Piramal Finance; Umesh Revankar, executive vice-chairman, Shriram Finance; Rajiv Sabharwal, MD & CEO, Tata Capital; and Sudipta Roy, MD & CEO, L&T Finance — speak to Manojit Saha about the key role NBFCs play in reaching unbanked, and underbanked customers by going directly to them, understanding their needs, and offering customised products. Edited excerpts:

 

Even as the Reserve Bank of India (RBI) introduced an on-tap window to obtain a licence, the euphoria around it has fizzled out. Given the growth and success of NBFCs over the past decade, does obtaining a bank licence still matter, or has its importance diminished? 

JAIRAM SRIDHARAN: Looking at India’s lending market over the past 25-30 years, non-banks have consistently accounted for about 25 per cent of the sector, with banks covering the remaining 75 per cent. This share has fluctuated marginally over five-year cycles but has remained broadly stable, similar to global patterns. India’s NBFCs are somewhat unique — leveraged, publicly listed institutions with balance sheets — yet this structure has persisted without creating systemic risk. NBFCs play a distinct role as last-mile connectors, often more efficiently than banks, enabling them to build highly profitable businesses that consistently outperform banks. Converting to a bank involves long and complex processes, so the rationale must be strong — primarily around liability stability.

 

RAJIV SABHARWAL: Both models are strong and have delivered results. Ultimately, success depends on strong governance, which allows any institution to thrive. The opportunity in India is enormous, and both banks and NBFCs have ample room to grow. NBFCs operate within regulations and have the same competitive opportunities as banks — expanding to new geographies, creating digital products, investing in technology, and serving customers effectively. Governance and risk norms for large banks and upper-layer NBFCs are comparable, and balance sheets are strong. There is no reason to believe NBFCs have fewer opportunities. At this stage, the potential is equally significant. 

Sudipta Roy: Traditionally, NBFCs raised funds from the market at a higher cost, which naturally pushed them towards segments that banks typically avoided. Banks, with access to cheaper deposits, focused on relatively safer customers. This created a clear stratification between banks, and NBFCs until a few years ago. That distinction has narrowed markedly.

With increased digitisation and the development of the digital ecosystem, NBFCs now have access to the same customer credit histories, liability data, and trade profiles through account aggregators — information that was once largely exclusive to banks. This has eliminated the 150-200 basis point risk-cost advantage banks earlier enjoyed. NBFC accounting, disclosure, and provisioning norms have become far more stringent, strengthening governance and balance sheets. While access to low-cost deposits remains a key advantage for banks. Beyond that, the playing field is largely level.

 

Umesh Revankar: Fifteen years ago, NBFCs aspired to become banks largely because of weak or limited liability franchises. Access to stable, low-cost funding was a major constraint. Over time, that has changed. Today, NBFCs have multiple funding avenues — active capital markets, access to ECBs, increased bank lending (partly driven by priority sector norms), and the growing co-lending model. As a result, the liability side is no longer a binding constraint, provided funding costs are managed well. On the asset side, NBFCs have consistently focused on unbanked and, more importantly, underbanked customers. Banks often face structural constraints — they may not be as nimble, may not go to the customer, or may struggle to customise products. NBFCs, by contrast, are built around going to the customer, understanding them closely, and tailoring solutions. Globally, even in mature markets like the US, around 20 per cent of customers remain unbanked or underbanked. In India, this gap is far larger and will take decades for banks alone to bridge. NBFCs, therefore, have a critical role to play and are already growing faster, with credit growth above 20 per cent, compared to banks’ 10-12 per cent. 

Raul Rebello: While NBFCs traditionally went to the customer and banks waited for customers to come to them, banks today are equally aggressive. In a country with only about 300 million credit-served customers out of a potential 800 million, the opportunity is massive. With co-lending gaining traction, the combination of NBFC distribution strength and bank balance sheets can effectively meet unmet credit demand. In many categories — vehicle finance, commercial vehicle lending, microfinance, and gold loans — NBFCs pushed the boundaries first, and banks followed.

 

Regulatory arbitrage has come down and was cited as one of the reasons behind the merger between HDFC Bank and HDFC. What are your views? 

SRIDHARAN: Banks face higher regulatory requirements such as the cash reserve ratio and statutory liquidity ratio, while NBFCs have lower regulatory overheads. On the other hand, banks benefit from access to low-cost, sticky deposits, which NBFCs lack. Earlier, regulatory oversight of NBFCs was relatively light-touch. That is no longer the case, especially for upper-layer NBFCs. 

Today, regulatory scrutiny for large NBFCs is comparable to that for banks. There are regulatory trade-offs between the two models. In some areas, harmonisation has progressed further; in others, less so. In certain cases, banks are ahead, and in others, NBFCs are. For example, NBFCs have long followed expected credit loss norms, while banks are only now transitioning to that framework. 

It is no longer accurate to view one sector as lightly regulated and the other as heavily regulated. They are simply two different business models. We are comfortable with the NBFC model, which has consistently delivered higher profitability than banks. 

SABHARWAL: India is a large market, and credit is a key driver of economic growth. Banks and NBFCs play complementary roles in expanding access to finance, particularly at the last mile. On the liability side, funding sources have evolved. Private non-convertible debentures (NCDs) now form a larger share, banks continue to provide strong support, and opportunities in bonds, dollar bonds, and ECBs now account for over 10 per cent of liabilities. Public NCDs and public deposits are also important avenues. Allowing well-gover­ned and highly rated NBFCs greater access to public deposits could further diversify funding and reduce concentration risk.

 

Do you think the RBI has not allowed more NBFCs to accept public deposits? 

Roy: Access to public deposits would certainly be welcome. However, the RBI has not issued new deposit-taking licences to NBFCs in recent years; only those granted licences 15-20 years ago continue to accept deposits. A calibrated beginning — especially for well-governed upper-layer NBFCs — could open another source of low-cost funding. This would diversify liabilities, reduce dependence on banks, and provide stability.

 

Now that there is an RBI-recognised self-regulatory organisation (SRO), could this help revive the case? 

Revankar: With an RBI-recognised SRO now in place, there is an opportunity to re-engage the regulator. A calibrated approach limited to strong, well-governed NBFCs could be considered. At the same time, India must deepen its corporate bond market. Retail participation could grow significantly with better awareness.

 

How are NBFCs tackling stress in unsecured lending? 

Rebello: Less than 3 per cent of our portfolio is unsecured. Credit risk is built into pricing, and performance should be assessed through cross-cycle returns, not one-year credit costs. 

Roy: The industry faced an asset quality crisis last year due to excessive post-pandemic growth. The sector is now in the final phase of stress, with normalisation expected by the fourth quarter. Deleveraging of nearly ₹1 trillion has already occurred, and timely intervention by the Microfinance Institutions Network, including coordinated lender action, borrower-level data sharing, and tighter self-regulatory discipline, helped stabilise the sector. 

SABHARWAL: The issue arose because multiple lenders extended credit to the same borrower over short periods. Faster credit bureau updates — now moving towards one week — are a critical structural improvement. At Tata Capital, early action has led to declining credit costs across segments.

 

What is the unique selling proposition of NBFCs from the point of view of a customer?

 

SRIDHARAN: NBFCs have cracked distribution, underwriting, and customer segmentation. Over four decades, they have driven most major lending innovations — home loans, automobile loans, microfinance, and gold loans — before banks scaled them. 

Revankar: NBFCs are designed to deeply understand customers and customise products. They will remain niche players with strong last-mile reach, specialised expertise, and deep customer insight. That distinctiveness is their enduring strength.