Reserve Bank of India Governor Sanjay Malhotra recently convened with leading Non-Banking Financial Company executives, emphasizing the critical need for robust underwriting standards and diligent asset quality monitoring. The meeting highlighted the sector's vital role in credit dissemination, particularly for MSMEs and underserved populations, while addressing concerns over lending practices. Gold loan-focused NBFCs specifically urged the RBI to establish a distinct regulatory category for their segment, reflecting a desire for tailored oversight amidst a growing market. The RBI also flagged irregular practices in gold loans, reinforcing the focus on compliance as the sector navigates increased regulatory attention.
Retail loan pricing at some non-banking financial companies (NBFCs) have increased, blunting the impact of the recent repo rate cuts, as borrowing costs for the sector climb amid an increase in bond yields, according to The Economic Times. While most NBFCs have kept rates unchanged in an intensely competitive market, working with lower profit margins, some have passed on higher funding costs to customers through increased lending rates or fees, experts said. The spread between borrowing costs for NBFCs and similarly rated corporates has widened to a four-year high, according to ratings agency India Ratings.
As of 2025 end, an AA-rated NBFC has to pay 75 basis points higher interest for a five-year loan than an AA-rated corporate - the highest since March 2022, as reported by The Economic Times. "Each investor will have a cap on how much can be invested in the NBFC sector," said Anil Gupta, senior vice president and co-group head at Icra Ratings. "At a time when liquidity is tight and credit growth is high, NBFCs are lining up to borrow. In such times, investors become selective in their lending to NBFCs and this also increases the bargaining power, increasing cost of funds for NBFCs," he explained.
The gold loan NBFC segment is projected for substantial growth, with assets under management expected to reach ₹4 lakh crore by March 2027. Upcoming regulatory adjustments, such as revised loan-to-value (LTV) norms for gold loans effective April 1, 2026, aim to provide additional lending headroom while ensuring market stability. NBFCs cater to a relatively weaker, sub-prime segment where the lending rates start from 12-13%, as reported by The Economic Times. "Here, if you increase the rate by 1-1.5%, the borrower may not feel the impact, but it is a dent in their pocket," said Soumyajit Niyogi, director at India Ratings & Research.
Yields of the 10-year benchmark bond closed at 6.65% on Friday, and have declined about 12 basis points since last year, according to The Economic Times. Despite this decline in bond yields and the RBI lowering the repo rate by a cumulative 125 basis points since February last year, NBFCs continue to face elevated funding costs. Jaykumar Shah, CFO at HDB Financial Services, noted: "While there was a rate cut which happened in December, that hasn't really translated much into lower cost of borrowing in most instances." Monetary policy impulses are transmitted to NBFCs' borrowing and lending rates, albeit incompletely, with higher cost of funds faced by NBFCs creating key impediments to transmission, according to a research paper published in the October RBI Bulletin. The NBFC sector, with a market size of USD 326 billion in 2023, demonstrates resilience despite these transmission challenges.