The Reserve Bank of India (RBI) is significantly intensifying its scrutiny of the deep connections between traditional banks and non-banking financial companies (NBFCs). The central bank's latest analysis indicates that these linkages have evolved from a secondary issue to a central pillar of its financial stability monitoring framework. This shift in focus comes amid concerns that in a volatile global climate, stress in one segment could rapidly transmit and magnify across the entire financial system.
From Peripheral Concern to Core Surveillance
In its recent report on banking trends, the RBI has made it clear that the interconnectedness between banks and NBFCs is now a primary element of its oversight. Policymakers are on high alert regarding the expanding role of non-banks and their increasingly intricate ties with the banking sector. The RBI asserts that as these connections grow deeper, maintaining stability will require "continued vigilance through robust supervision, effective macroprudential frameworks and enhanced oversight of interconnectedness". The emphasis is strategically moving away from just tracking headline growth numbers to meticulously mapping the channels through which financial stress could propagate.
Funding Dependence and Regulatory Measures
A major channel for potential risk is the heavy reliance of NBFCs on bank credit. This funding dependence creates a clear pathway for trouble originating in the non-bank sector to spill over swiftly into the banking system. To mitigate this concentration risk, the RBI took a decisive step in November 2023 by increasing the risk weights on bank exposures to NBFCs. This move was designed to discourage excessive lending concentration. While the central bank provided some relief in February 2025 by partially rolling back these higher weights for highly-rated NBFCs, it has signaled an unwavering commitment to continuously monitor and manage system-level concentration risk as a key part of its financial stability toolkit.
The need for such vigilance is underscored by NBFCs' robust credit expansion. Data shows that NBFC credit as a share of scheduled commercial banks' credit increased to 25.3% from 23.6% a year ago. Their credit-to-GDP ratio also climbed to 14.6%. This outperformance was widespread, with NBFCs recording higher credit growth than banks across major segments including industry (18.3% vs 8.2%), services (29.8% vs 12.0%), and retail loans (18.1% vs 11.7%).
Domestic Stress and Global Lessons
However, not all segments are booming uniformly. The report highlights emerging stress in the microfinance sector, noting that most lenders in this category, excluding "other NBFCs", recorded a contraction in credit at the end of March 2025.
The RBI also contextualizes these domestic concerns within the global financial landscape. It points to international episodes of market stress that have demonstrated how liquidity pressures in non-bank financial institutions can escalate dangerously fast, often triggered by sudden spikes in margin and collateral calls. The central bank warns that such pressures can inevitably transmit to the traditional banking sector unless regulatory frameworks are proactively adapted to identify and manage leverage and liquidity risks within the non-bank domain.
The overarching message from Mumbai is clear: in an uncertain world, safeguarding India's financial system requires a laser focus on the fault lines where banks and shadow banks meet. The RBI is positioning its supervision to ensure that the very links that fuel credit growth do not become conduits for contagion.
