Financing India’s growth – ETCFO-OxBig News Network

What will strengthen India in the near future?

While there may be many answers to this question, perhaps the most integral one is: how do we finance India’s growth?

At ETBFSI.com, we this week hosted our NBFC Connect 2025 summit with industry leaders in Chennai on the theme Financing India’s Growth. One CEO summed it up well when he said, “This is not just an opportunity — it’s a responsibility.”

The current state of finance

There is an urgent need for innovation in how we approach credit — particularly in the way we fund businesses and retailers. Lenders must look beyond margins and embrace the responsibility of nation-building. There are thousands of entrepreneurs and businesses that never scaled up, simply because they couldn’t access funding. Digital platforms are beginning to transform this space, but more needs to be done.

NBFCs have a pivotal role in bridging India’s Rs 20–25 lakh crore credit gap in the MSME sector. They must now focus on expanding access through technology, diversified funding, and inclusive lending models, noted Brajendra Navnit, Principal Secretary, IT & Digital Services Department, Tamil Nadu, delivering the keynote address at the ETBFSI summit.

India’s ambition to become a $30 trillion economy by 2047 is bold, but not implausible. To make that leap, the country needs a robust and inclusive financial ecosystem that can sustain and accelerate development, especially in times of global uncertainty. As the traditional banking sector contends with legacy issues and evolving regulations, non-banking financial companies (NBFCs), microfinance institutions (MFIs), and alternative capital sources like private credit are increasingly stepping into the spotlight.

New models for credit

While the government has launched multiple schemes — including Mudra, Vishwakarma, Startup India, and Stand-Up India — the financing remains inadequate. The corporate bond market and AIFs (Alternative Investment Funds) need to deepen. Similarly, private credit, although gaining momentum, remains limited in scope. Family offices are emerging as players, but their focus often remains skewed towards returns rather than social impact.

We must actively develop alternative lending models. For example, using datasets such as GST filings and electricity bills can revolutionise credit assessment. “Electricity billing is one of the cleanest datasets we have,” a participant observed.

While such approaches are being used for consumer lending, it is time to build robust cash-flow-based lending models for businesses as well.

NBFCs: More Than lenders, they’re enablers

NBFCs have long been instrumental in bridging the gap between formal finance and underserved communities. Their agility, customer proximity, and ability to tailor products to niche segments give them a unique edge in powering small businesses, especially in Bharat — the vast expanse of semi-urban and rural India. As India seeks to deepen credit penetration in Tier 3 and Tier 4 cities, NBFCs will be pivotal in unlocking the housing boom and fuelling grassroots entrepreneurship.

But their role is not without challenges. While top-tier NBFCs can still tap the markets with relative ease, the cost of funds remains a sticking point. For newer players and fintechs, credit is available — but expensive and often conditional. Navigating these headwinds demands innovation in business models, better alignment with banks for co-lending, and recalibration of rate strategies.

Private credit: A double-edged sword

With public markets increasingly volatile and regulatory frameworks shifting, private credit is becoming a viable alternative for borrowers, particularly lower-rated companies squeezed out of mainstream funding channels. This trend mirrors the post-pandemic financing landscape, where flexibility and speed trumped structure. However, reliance on instruments like NAV-based lending and slower LBO exits suggest that private credit will have to prove its mettle in a less forgiving economic climate. Asset quality and systemic risk are very real concerns if macroeconomic stress increases.

Micro, small, and medium enterprises (MSMEs) are the backbone of the Indian economy, contributing nearly a third of the GDP. Yet, a massive credit gap persists, estimated at over Rs 25 lakh crore. Bridging this deficit is crucial for job creation and inclusive growth. NBFCs, MFIs, and digital lenders are best positioned to step in, especially if supported by favourable regulations, deeper co-lending frameworks, and access to long-term, low-cost capital.

Strategic Investment and Fiscal Prudence

The government has rightly focused on infrastructure-led growth, allocating over Rs 11 lakh crore in the Union Budget 2024–25. Initiatives like Bharatmala, Sagarmala, and Gati Shakti aim to supercharge logistics and connectivity. These programmes not only generate immediate employment but also boost long-term productivity. However, they must be balanced against the backdrop of a 4.9% fiscal deficit and rising public debt. Rationalising subsidies and broadening the tax base are essential to keep the growth engine running without overheating public finances.

Retail participation in capital markets is rising, with household investments increasingly flowing into equities and mutual funds. This shift, driven by financial literacy campaigns and improved digital platforms, is a welcome move towards mobilising domestic savings for productive investments. A deeper, broader investor base also lends resilience to market cycles, cushioning against global shocks.

Foreign capital will continue to play a vital role. India’s success in attracting FDI across strategic sectors reflects global confidence in its policy direction and economic potential. Reforms in land, labour, and the ease of doing business remain critical to sustain this momentum. International players look not just for opportunity, but for clarity and consistency in regulations.

The role of regulation and inclusion

India’s financial regulators have walked a tightrope between fostering innovation and ensuring stability. Going forward, a sharper regulatory lens on rapidly growing segments like NBFCs and private credit is inevitable. But this scrutiny should be accompanied by policies that expand access, reduce compliance friction, and support responsible innovation.

Inclusion remains the bedrock of India’s financial strategy. Expanding the reach of digital financial services, increasing Mudra loan limits, and strengthening credit guarantees are steps in the right direction. Empowering citizens with access to credit, savings, and insurance builds not just individual resilience, but national strength.

A collaborative financial architecture

Financing India’s growth story requires a multi-pronged approach — one that taps into domestic savings, leverages foreign investment, reforms public spending, and energises private capital. It demands a collaborative financial architecture where banks, NBFCs, fintechs, and regulators work in unison. Growth is not just about numbers on a balance sheet; it’s about unlocking the potential of every entrepreneur, worker, and household. That’s the story India must finance — and the future it must build.

The role of finance companies — and finance heads — will only grow in importance. Whether it’s funding infrastructure, MSMEs, digital enterprises, or rural entrepreneurs, India’s financial sector must evolve rapidly to meet the demands of this ambitious journey.

(Editor’s note is a column written by Amol Dethe, Editor, ETCFO Click here to read more of his articles exploring several buzzing topics)

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