Non-banking financial companies, which have been grappling with the limitations placed on their funding avenues, called on regulators to grant NBFCs access to public deposits, a privilege currently reserved for banks.
The Reserve Bank of India (RBI) has been cautious about expanding this access to NBFCs, citing concerns over the risks posed by potential conflation between banks and NBFCs.
However, panelists at the Mint BFSI Summit 2025 on Friday argued that allowing NBFCs to tap into public deposits could significantly enhance their funding options, particularly as they face rising costs from international borrowings and reliance on banks.
Jairam Sridharan, managing director of Piramal Finance, highlighted that about half of the funding for NBFCs comes from loans provided by banks, as other sources like the Indian bond market and international borrowings are limited, particularly for lower-rated NBFCs.
Without access to deposits, the funding landscape remains restrictive, Sridharan said, emphasizing that for established players with strong reputations a deposit-taking licence could diversify funding sources and reduce reliance on external markets.
NBFCs have become heavily dependent on bank funding, leading to funding concentration, which prompted RBI to hike risk weights on bank loans to NBFCs in November 2023. To offset this, NBFCs increased funding through external commercial borrowings (ECBs).
Citing this, Manish Shah, MD and CEO of Godrej Capital, echoed the need for diversified funding sources but added that deposits should not become a dominant part of an NBFC’s funding strategy.
In Godrej Capital’s case, deposits constitute less than 5% of the overall funding, he said, underscoring that deposits should serve as a supplementary source rather than be the primary one.
While ECBs have been a favoured option for higher-rated NBFCs due to competitive interest rates, the overall cost of borrowing for these institutions remains elevated.
Jinay Gala, director at India Ratings and Research, pointed out that securitization, co-lending models, and bank loans are also pivotal sources of funding. However, for mid-sized and lower-rated NBFCs, over-dependence on bank loans and promoter funding poses a risk, with alternative avenues remaining limited, he added.
From a consumer standpoint, Shah of Godrej Capital suggested that offering deposit products could provide better returns for savers, especially when compared to bank deposit rates.
He emphasized that the primary benefit of allowing NBFCs to accept public deposits would be to expand the spectrum of choices available to consumers, enabling them to select products that align with their risk-return preferences.
Furthermore, Shah pointed out that for borrowers, a more stable and diversified liability base would reduce the overall cost of borrowing, ultimately benefiting consumers with lower loan rates.
Sridharan of Piramal Finance expanded on this idea by addressing the role NBFCs play in serving underserved market segments. NBFCs are particularly crucial for self-employed individuals and small business owners in tier 2 and tier 3 cities, who often struggle to access credit from mainstream banks, he said.
NBFCs fill this gap by taking on higher risks, underwriting loans for customers who would otherwise be overlooked, Sridharan said, adding that granting NBFCs access to public deposits would help maintain and expand credit access to these segments.
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As NBFCs continue to grow in prominence, regulators have become more focused on managing the associated risks.
Gala of India Ratings emphasized that the systemic importance of NBFCs is rising, with the sector now accounting for about 25% of the total lending in the country. However, with this comes the need for more robust regulation, he said.
Gala suggested that a grading system could be a useful way to assess which NBFCs are suitable candidates for accepting deposits, based on factors like financial stability and compliance with regulatory standards.
The discussion also touched on the heightened regulatory scrutiny of housing finance companies (HFCs), particularly following their transition from the National Housing Bank (NHB) to RBI’s oversight.
Sridharan highlighted that stricter regulations are a global trend in the financial sector, especially for businesses that handle public funds. But he also emphasized the importance of consistency and transparency in the application of these rules to provide clarity for the sector.
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