NBFCs Shine Yet Face Hurdles

The financial year ending March 2025 paints a picture of robust growth for Non-Banking Financial Companies (NBFCs) in India, as evident from the Q4 business updates of Bajaj Finance and L&T Finance. However, this expansion comes even as regulatory scrutiny intensifies, casting a shadow on the sector’s otherwise bright performance.

Loan Books Bulge, Disbursements Soften

L&T Finance reported a healthy 18.8% year-on-year surge in its retail loan book, reaching ₹95,100 crore. This growth underscores the company’s successful pivot towards retail lending, with the retailisation ratio improving to an impressive 97%. Collection efficiency remains strong at over 99% for rural loans. However, a closer look reveals a slight contraction in overall retail disbursements for the quarter, down 1.16% year-on-year. While SME and urban finance disbursements saw increases, a significant 11.41% drop in rural business finance disbursements might signal headwinds in the agricultural sector, or a cautious approach to rural lending.

Bajaj Finance Thrives, RBI Frowns

Bajaj Finance, on the other hand, showcased stellar growth across key metrics. Assets Under Management (AUM) jumped 26% year-on-year to ₹4.17 lakh crore, and new loans booked soared by 36%. The customer base expanded to over 100 million, demonstrating the company’s widening reach. Deposits also grew strongly, indicating investor confidence. Yet, against this backdrop of robust performance, Bajaj Finance received a “letter of displeasure” from the Reserve Bank of India (RBI) regarding its co-branded credit card business. The RBI flagged concerns about inadequate internal controls, reactive approach to risk identification, and customer data management in these partnerships. This regulatory rap on the knuckles mandates RBI approval for future co-branding ventures and stricter audit requirements.

Regulatory Tightening on Cards?

The RBI’s action against Bajaj Finance highlights a potentially increasing focus on regulatory compliance within the NBFC sector, particularly concerning innovative but potentially risky products like co-branded credit cards. While NBFCs have been instrumental in driving financial inclusion and credit growth, their rapid expansion and diverse product offerings necessitate robust risk management and adherence to regulatory guidelines. The contrasting narratives of growth and regulatory censure suggest that NBFCs must now navigate a landscape where expansion needs to be carefully balanced with stricter compliance and risk mitigation measures.

What does this mean for the future of NBFCs? Sustained growth is likely, given the demand for financial services across India. However, NBFCs must proactively address regulatory concerns, strengthen internal controls, and prioritise customer protection to ensure long-term stability and investor confidence. The focus will now be on responsible growth, rather than just topline expansion.

Image Courtesy: X (All India Radio News)