Diversified Credit Flows Strengthen Economy, But Demand a Broader RBI Lens

India’s credit story is no longer solely driven by banks. Once dominated almost entirely by banks, credit flows are increasingly shared with non-bank players--from NBFCs to Housing Finance Companies and All India Financial Institutions. This diversification is no longer a statistical footnote but a defining feature of how credit is intermediated in the economy.

Non-food bank credit continues to anchor the system, accounting for 55.1% of GDP at end-March 2025. Yet, non-bank credit has climbed to 26.9% of GDP. Combined, they lifted overall outstanding credit to 81.9% of GDP, up from 80.2% a year earlier. The picture is unambiguous: banking remains central, but non-bank financing has become indispensable.

The RBI’s September 2025 Bulletin underlines this transition. Bank credit flows fell sharply in 2024–25, down to ₹18 trillion from ₹21.4 trillion a year earlier. Despite this contraction, overall commercial sector financing grew, buoyed by a ₹4.5 trillion jump in non-bank resources. In effect, non-bank entities insulated the economy from a bank-credit slowdown.

NBFCs remain the dominant non-bank force, with a strong presence in industry and retail. The power sector, in particular, absorbs a significant share of their lending. HFCs, by contrast, focus heavily on individual housing loans, while AIFIs sustain their developmental mandate in agriculture, housing, and infrastructure. Together, these players extend credit to segments either underserved or bypassed by banks, filling gaps critical to India’s growth trajectory.

What explains their ascent is adaptability. Non-banks have been quicker in tailoring products, targeting specific sectors, and taking risks where banks remain cautious. Market-based funding avenues — particularly equity and bonds — have also gained ground, offering corporates cheaper and more flexible options compared to traditional bank loans. Banks, meanwhile, grapple with tighter capital requirements after the RBI’s prudential measures on unsecured lending and NBFC exposures.

This diversification enhances resilience but complicates oversight. When nearly one-third of commercial credit originates outside the banking channel, systemic stability cannot rest on bank supervision alone. Risks of asset-liability mismatches in NBFCs, concentration in HFCs, and interconnected exposures between banks and non-banks highlight the fragility beneath the surface.

For the RBI, the regulatory mandate is clear: broaden the supervisory lens. This requires deeper risk-based supervision of large NBFCs, sharper monitoring of interlinkages between banks and non-banks to prevent contagion and expanded oversight of capital market financing to ensure leverage remains sustainable outside the banking system.

India’s credit ecosystem is more diversified and resilient than ever before. But with complexity rising alongside growth, the RBI’s ability to adapt its supervisory framework will determine whether this financial transformation strengthens stability or magnifies risks.