Informist, Wednesday, Jul. 9, 2025

NEW DELHI – Finance Minister Nirmala Sitharaman Wednesday said non-banking financial companies are no longer "shadow banks"--a term used to describe institutions that undertake lending activities like banks but operate outside the traditional banking sector. She said NBFCs have reached a stage where they can transition to become banks.

"The stronger regulation and oversight is the best testimony of your (NBFCs) importance in the financial system and the broader economy," Sitharaman said at the NBFC Conclave in the national capital. She said systemically significant NBFCs have grown in size and complexity, and their governance and compliance standards are comparable to public sector banks.

"I think this marks an important evolution where robust NBFCs can graduate to being banks, creating a continuum of institutional growth within the financial sector," the finance minister said.

India needs more large banks and also a huge number of NBFCs to be present on the groud, Sitharaman said. NBFC credit should reach at least 50% of the total volume disbursed by scheduled commercial banks by 2047, she said. Currently, NBFCs account for around 24% of the volume of credit disbursed by scheduled commercial banks. By 2047, at least 50% of NBFC credit should be directed towards high-growth, high-impact sectors, the finance minister said.

Sitharaman said the government was committed to supporting the NBFC sector by creating a regulatory environment that supports innovation while ensuring risks are well managed. The government also wants a consultative approach, Sitharaman said, adding that issues flagged by NBFCs will be given due attention.

NBFCs met Sitharaman and Department of Financial Services Secretary M. Nagaraju on Wednesday before the conclave, where they raised several issues. "They wanted the liquidity window," a source who was present at the meeting said. "Currently they don't have a specified liquidity window. They have just two sources, they issue the CPs (commercial papers) or borrow," the source said.

The finance minister called for more collaboration between NBFCs and banks, especially through co-lending arrangements. She also asked banks to consider partnerships with NBFCs to enhance their priority sector lending. Sitharaman said priority sector lending amount remains unutilised by banks, which is then sent back to the Department of Financial Services and then transferred to National Bank for Agriculture and Rural Development.

"Why should priority sector lending money be coming back to the secretary? It should be in the ground, with the people for whom it was meant," the finance minister said. "But, that number is growing every year. I would rather see the synergy between NBFCs and the PSBs (public sector banks) work together to the advantage of the customers, who should get it that year itself."

Sitharaman said the cost of funds for NBFCs has come down recently, thanks to the RBI's steps. NBFCs should pass on the benefits of lower cost of funds to customers, she said. "Recent regulatory measures such as the restoration of risk weights on bank lending and the easing of financial conditions are expected to further improve credit prospects, strengthening the overall funding environment for the sector," she said. Interest rates should be reasonable and all charges should be clearly disclosed in a simple and transparent manner, free from hidden costs or complicated terms, she said.

Sitharaman said the loan recovery practices of NBFCs must be fair, empathetic, and respectful in strict accordance with the Reserve Bank of India's fair practices code. "The push for growth should not come at the expense of customer well-being."

NBFCs should focus more on risk management, Sitharaman said, adding that risk taking has to be well-planned and never beyond the absorption capacity of a company. NBFCs should lend based on genuine needs and repayment capacity of customers, she said. Financial exploitation in name of financial inclusion is not acceptable, she added.

In his speech, Nagaraju said all NBFCs and their fintech partners should adopt ethical lending practices, safeguard customer data, and invest in robust cybersecurity systems. "We encourage NBFCs to explore consolidation, build stronger balance sheets, invest in capacity building, and adopt global best practices in governance and risk management," he said. End

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

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