Although non-banking financial companies (NBFCs) cater to slightly different customer categories, such as those with weaker credit scores, self-employed people and those without salary income, data from a credit bureau showed they have gained market share from banks in this segment.
A personal loan is unsecured, meaning borrowers don’t need to provide any collateral, and is categorised as a consumption loan. After the central bank tightened lending norms for higher-risk categories in 2023, banks decided to go slow on advancing such loans.
The aggregate market share of outstanding personal loans held by banks – both private and public sector – fell 260 basis points (bps) to 70% in FY25 from 72.6% in FY24, whereas the market share of NBFCs increased by 160 bps to 23.5% in FY25 from 21.9% in FY24, according to data from credit bureau Crif High Mark. The remaining market share was held by other financial institutions including cooperative banks and small finance banks.
Non-bank lenders have increased their market share by targeting borrowers often ignored by banks, especially those who earn low income or are new to credit, said Kunal Varma, chief executive officer and founder of Freo, a digital banking platform with an NBFC licence. Banks, said Varma, have been more cautious in these segments.
The Crif data showed that NBFCs increased their share in personal loan originations by value to 36.4% in FY25 from 32.2% in FY24. Originations refer to the process of onboarding customers, doing due diligence and assessing their credit eligibility.
The share of private banks in personal loan originations decreased to 29.2% from 29.8% during the same period. India’s public sector banks held 31% of the market share in FY25, although their share also declined from 33.6% in FY24.
According to Rohit Patwardhan, chief credit officer at HDB Financial Services, the NBFC owned by HDFC Bank, India’s largest private sector lender, the rise in personal loans reflects a structural shift in the economy.
No undue risks
“There is a growing move toward a consumption-driven economy. NBFCs have built their personal loan portfolios by targeting borrowers in tier-2 and below cities through lower ticket-size loans,” said Patwardhan.
Banks continue to focus on salaried, middle-aged borrowers in tier-1 cities and this divergence in strategy has allowed NBFCs to cater to a wider and often underserved customer base, he said. HDB Financial Services had assets of ₹1.09 trillion under management at end-June.
Patwardhan said NBFCs are not taking undue risks despite the unsecured nature of these loans.
“We maintain strict credit assessment practices and leverage technology such as AI and big data analytics for accurate risk profiling. This helps mitigate the risk of over-indebtedness,” he said.
Freo’s Varma said, “The digital-first and quicker loan disbursement, minimal documentation, flexible underwriting, and scalable model make NBFCs more accessible, particularly in tier-2 and tier-3 cities”
NBFCs reduce risk by using several layers of underwriting that incorporate credit bureau scores, income verification, spending habits, and even behavioural information, he said.
According to data from EY, the overall credit books of NBFCs expanded at a compounded annual growth rate (CAGR) of almost 20% from FY22 to reach ₹28.2 trillion by FY25.
“This growth was largely driven by a 2.3x jump in unsecured lending, primarily personal loans, compared to a 1.6x increase in similar lending by banks,” said Pratik Shah, partner and national leader, financial services, EY India. Although NBFC credit growth moderated to 17-20% in FY25, bank credit growth slowed more sharply to around 12% year-on-year, he said.
Risk weights
In November 2023, the Reserve Bank of India increased the risk weights on consumption loans, credit card exposure and loans to NBFCs by 25 percentage points each. This came after several months of attempts to sensitize lenders against the ongoing credit binge.
Risk weights are pivotal in banking regulation as they dictate the capital set aside for various loan types, reflecting their risk profiles. Unsecured loans, perceived as riskier, have higher weights, thus requiring more capital.
Although the risk weight increases on bank loans to NBFCs were rolled back in February, those on unsecured loans remain. Banks are already seeing signs of some improvement in the asset quality of personal loans. As Amitabh Chaudhry, CEO of Axis Bank, told reporters last week, “There are clear signs of improvement.”
Jitendra Meghrajani, associate director at CareEdge Ratings, said the RBI’s increased oversight on unsecured lending has impacted the personal loan growth of banks and NBFCs differently, reshaping lending strategies.
“Banks responded to the regulatory caution by reducing their disbursements towards unsecured personal loans and shifting focus towards other segments. Single-product/personal loan focused NBFCs including fintechs paused briefly, tightened their underwriting norms and resumed growth,” said Meghrajani.
Meghrajani added that NBFCs led by fintechs have increased their share of disbursements in the sub- ₹50,000 personal loan category.
Slower disbursements
However, not everyone is convinced that NBFCs are rushing towards more unsecured loans. Some experts said NBFCs have slowed their disbursements of unsecured loans after the higher risk weight led to reduced lending from banks to NBFCs.
According to Pankaj Naik, director at India Ratings & Research, asset quality has been range-bound for personal loans because a good proportion of the loans are to the salaried segment, and there have been no severe job losses.
“Over a period of time, underwriting models have also been fine-tuned to onboard the right set of customers,” said Naik.
India Ratings said the asset quality of personal loans may not show stress in FY26 if there is adequate growth in income levels and NBFCs refrain from growing the loan book.