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Small NBFCs: The Backbone of India’s Lending Ecosystem—Yet Struggling to Scale

  • 10-Jan-2026
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Small NBFCs: The Backbone of India’s Lending Ecosystem—Yet Struggling to Scale

Small NBFCs play a critical role in India’s financial ecosystem. They reach underserved borrowers, support MSMEs, and operate in geographies where traditional banks often hesitate.

Yet, despite their importance, many small NBFCs struggle to scale sustainably.

Why does this happen—and more importantly, how can it be fixed?

Key Challenges Faced by Small NBFCs

1️⃣ Funding Constraints

Accessing capital remains one of the biggest hurdles.
Small NBFCs often face:

  • Limited funding options

  • Higher borrowing costs

  • Shorter tenures and restrictive covenants

Without diversified funding, growth becomes expensive and risky.

2️⃣ Limited Visibility & Market Trust

Smaller balance sheets and regional operations often result in:

  • Lower investor confidence

  • Reduced lender appetite

  • Slower customer acquisition

In today’s market, perception matters as much as performance.

3️⃣ Heavy Compliance Burden

RBI regulations have become more detailed and frequent. Small NBFCs struggle with:

  • Multiple regulatory filings

  • Ongoing audits and inspections

  • Evolving digital lending and governance norms

  • Lack of dedicated compliance infrastructure

Compliance gaps can quickly lead to penalties—or worse, regulatory action.

4️⃣ Market & Portfolio Concentration Risk

Many small NBFCs lend within:

  • A single geography

  • One borrower segment

  • One product category

This lack of diversification exposes them to economic shocks, defaults, and regional disruptions.

The Way Forward: How Small NBFCs Can Scale Smartly

Scaling is possible—but it requires a structured, compliant, and future-ready approach.

1. Strong Governance Framework

Professional boards, transparent reporting, and clear policies build long-term credibility with lenders, investors, and regulators.

2. Digital Adoption

Technology-led processes for:

  • Loan origination

  • Credit assessment

  • Collections

  • Compliance reporting

Digital systems reduce cost, improve efficiency, and enhance regulatory readiness.

3. Diversified Funding Strategy

Moving beyond single-source funding through:

  • Bank partnerships

  • Co-lending models

  • Securitization

  • Structured debt

Diversification lowers cost of funds and supports sustainable growth.

4. Expert Compliance & Strategic Guidance

With regulations evolving rapidly, expert advisory support helps NBFCs:

  • Stay RBI-compliant

  • Avoid costly mistakes

  • Prepare for audits and inspections

  • Plan growth with confidence

The Bottom Line

Small NBFCs are too important to fail—but too exposed to grow alone.

Those that invest early in governance, technology, diversified funding, and expert guidance will not only survive—but scale responsibly and profitably.

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Credits:
Created by Rahul
Graphics & Scripting: Arpita Singh
Voiceover: Shivendra

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