In today's FirstScroll, we break down why it is getting harder to get a bank loan even as banks report record profits, and why NBFCs are now the gateway to credit for millions of Indians.
The short answer: While India's largest banks are posting record earnings, strict liquidity rules and a focus on high-margin corporate clients are locking out smaller borrowers. This has allowed NBFCs to capture the market, with 74 percent of new-to-credit customers now relying entirely on non-bank lenders to enter the formal financial system.
The Story
Picture a young woman in a small town in rural Rajasthan. She runs a successful boutique and wants a small-ticket loan to buy new sewing machines for the festive season.
She walks into a large public sector bank with her ledger in hand. The manager looks at her lack of a formal credit score and shakes his head, politely explaining that she does not meet their strict lending criteria.
Frustrated, she opens a fintech app on her phone that is backed by a Non-Banking Financial Company (NBFC). Within twenty minutes, after a digital KYC and a quick scan of her bank statements, the money is approved.
This is not an isolated story. It is the new reality of the Indian economy, where the traditional pillars of finance are stepping back just as the country's credit needs are exploding.
Then, look at the bank's side of the ledger. India's top five lenders, including SBI and HDFC Bank, are expected to report profit growth between 7 percent and 17 percent for the quarter ended September 2026.
And here is the strange part. Even with these massive profits, banks are actually becoming more cautious about who they lend to, leaving a massive gap in the market.
So here's the question: if big banks are posting record profits, why is it getting harder for the average first-time borrower to get a loan?
You see, the problem is not that banks are running out of money. It is that the money they have is becoming more expensive to keep and less profitable to lend to everyday people.
Think of a bank as a high-end restaurant. They have plenty of tables, but the cost of electricity and staff is so high that they only want to serve customers who order the most expensive tasting menu. Small, quick orders just do not cover the overheads anymore.
For banks, that "overhead" comes from something called Net Interest Margins (NIMs). This is essentially the profit a bank makes by charging more for loans than it pays to depositors.
Right now, those margins are under pressure. Analysts expect a fall of 5 to 10 basis points in margins across most major banks this quarter. To keep their profits up, banks are sticking to "safe" bets: large companies and wealthy individuals with perfect credit scores.
This caution is partly due to a liquidity squeeze. When the central bank makes it harder for banks to keep surplus cash, as we saw when RBI began draining ₹3 lakh crore from banks, they become very picky about their lending.
This is where the NBFCs have stepped in. While banks focus on the big fish, NBFCs are diving into smaller-ticket lending that banks find too tedious.
In the segment for loans up to ₹2 lakh, NBFCs contribute 47 percent of originations, while traditional banks handle only 17 percent. They have built a system that thrives on speed and flexibility rather than just thick stacks of paperwork.
Now add the second ingredient: reach. NBFCs are now just as present in rural and semi-urban markets as banks are, and they are much faster at approving things like Buy Now Pay Later schemes or consumption loans.
But why should you care? Because if you are a first-time borrower, your "entry ticket" to the financial system is no longer a bank passbook. It is an NBFC loan.
But here's the twist. This shift means that NBFCs are now carrying the weight of India's riskier borrowers. While banks play it safe, NBFCs have grown their credit-active consumer base by nearly 7x over the past decade, which is 2.5 times faster than the rest of the industry.
This rapid growth has caught the eye of policymakers. Amitabh Kant recently argued for cutting the statutory liquidity ratio (SLR) to help lower the cost of credit. SLR is the chunk of money banks must legally keep in safe government bonds, and cutting it would free up more cash for lending.
Without such changes, banks might continue to ignore the "below prime" consumers who make up 35 percent of the NBFC customer base. These are the people who are just starting their credit journey and have yet to prove they are safe bets.
Now to be clear, banks are not being stubborn. They are facing higher costs from deposits like the Foreign Currency Non-Resident (Bank) scheme, which provides liquidity but at a price that eats into their profits.
So, is the lending shift about banks losing interest? Not really. It is about a two-speed financial system where banks provide the stability and NBFCs provide the access.
Whether this massive bridge built by NBFCs can hold up if the economy slows down is something only time will tell.
Until then…
If this story helped you make sense of why banks reject first time borrowers but NBFCs approve, share it with a friend on WhatsApp, LinkedIn, or X. You might also enjoy our story on why a star fintech turned itself into a boring bank.
