NBFCs set to outpace banks in India by 2035 with AI adoption: report

NBFCs Poised for Rapid Expansion Ahead of Banks

India's financial landscape is on the cusp of a major shift, with non-bank financial companies (NBFCs) expected to outpace traditional banks in growth over the next decade. According to recent analysis, NBFC credit is projected to expand at an annual rate of 17 percent from fiscal year 2025 to 2035, compared to just 12 percent for banks. This surge comes as banks currently hold over 70 percent of the total credit market, but NBFCs are gearing up to close the gap through innovative strategies.

The rise of NBFCs is largely driven by their agility in tapping into underserved markets, such as retail loans for consumers and small businesses that banks often overlook. With India's economy pushing towards ambitious growth targets, these nimble players are positioning themselves to meet rising credit demands in a more personalized way. Experts point to this momentum as a sign of diversification in the lending sector, potentially benefiting millions of borrowers who seek quicker access to funds.

AI Emerges as the Game-Changer in Lending

Artificial intelligence is at the heart of this transformation, revolutionizing how loans are assessed and disbursed. NBFCs are leveraging AI to sharpen credit underwriting, enhance customer service, and even bolster cybersecurity measures. By analyzing alternative data sources, these tools help identify reliable borrowers who might slip through conventional checks, making lending more inclusive and efficient.

This technology isn't just about speed; it's about precision. AI systems can process vast amounts of information in seconds, approving loans faster and reducing risks for lenders. For NBFCs, which often deal with high-volume, smaller-ticket loans, this means scaling operations without proportional increases in staff or overheads. The result is a more competitive edge, allowing them to venture into new products like personal finance and vehicle loans with confidence. Regulators are watching closely, with the central bank issuing guidelines to ensure responsible use of these advanced systems.

"AI can help NBFCs identify potential prime customers and bring about more efficiency in high-intensity product segments at a transformative pace, though we caution on the regulatory gaps that need addressing," states the analysis from financial experts.

Broader Economic Implications and Challenges

The growth of NBFCs aligns with India's broader economic ambitions, where AI is expected to inject hundreds of billions into the national GDP by 2035 across various sectors. In finance specifically, it promises to expand credit access, particularly for small enterprises and rural consumers, fostering job creation and consumption. However, this rapid evolution brings hurdles, including the need for robust data privacy frameworks and skilled talent to handle AI integrations.

Competition is heating up as more players invest in digital tools, potentially leading to a more dynamic market. Yet, NBFCs must navigate stricter oversight to avoid past pitfalls like over-leveraging. Banks, too, are adapting by incorporating similar tech, but their larger size and legacy systems might slow their pivot. Overall, this shift could democratize finance, making it more accessible while spurring innovation. Policymakers are urged to balance encouragement with safeguards to sustain this trajectory.

In summary, NBFCs' AI-driven ascent signals a vibrant future for India's financial services, promising faster growth, wider credit reach, and economic upliftment by 2035, provided regulatory and operational challenges are met head-on.