NBFC Funding Divide: Why Fitch Sees a "K-Shaped" Market for Large and Small Lenders

Fitch says large NBFCs are stronger than in 2019 but funding is K-shaped. Here is why smaller NBFCs pay more and what risk teams should watch.

NBFC funding is splitting into two tracks. At Business Standard's BFSI Insight Summit on 26 October 2026, Fitch Ratings' Elaine Koh said larger non-banking finance companies are far stronger than during the 2019 liquidity crisis, while smaller ones face a tougher, costlier funding environment. Industry leaders on a separate panel agreed that diversifying funding is much harder for smaller players. Here is what they said and why it matters for lenders, investors and credit-risk teams.

What "K-shaped" means

A K-shaped pattern is one where two groups move in opposite directions, like the two arms of the letter K. Koh said that since the RBI's scale-based regulation, Fitch has seen banks favour upper- and middle-layer NBFCs, leaving smaller NBFCs with higher funding costs. Scale-based regulation sorts NBFCs into layers by size and risk, with stricter rules for bigger ones.

Why large NBFCs look stronger

Koh described the difference from 2019 as "chalk and cheese," referring to the liquidity crisis of that year. Fitch's rated NBFC portfolio has grown threefold since then from a small base. Overseas investors have returned, though higher US dollar rates have made them selective, and pricing is now a key factor. Nearly all NBFC issuance over the past three years has gone through GIFT City and India INX rather than offshore exchanges; Koh sees this as a diversification channel, not a major near-term source.

Why smaller NBFCs struggle

Piramal Finance's Jairam Sridharan said an NBFC rated AA or higher can reach many funding markets, but most NBFCs are rated A or below and rely mainly on banks and bodies like the National Housing Bank. He said rating caps limit smaller firms, which helps explain why upper-layer NBFCs grow faster. Koh said smaller NBFCs seeking bond-market access need a strategy that works across cycles, management not overly dependent on founders, and sound governance.

Think of ratings as a credit score for a company. A high score opens many doors; a lower one leaves only a few, and each charges more.

The numbers on market share

Sridharan said NBFCs hold roughly 25% of lending and banks about 75%, with the NBFC share ranging between about 20% and 30%, currently around 26-27%.

Risks flagged

- Household leverage: Koh said it is approaching 45%, per the RBI, and the quality of non-mortgage household credit growth needs monitoring. - Gold loans: Delinquencies have doubled but remain below 1%, and RBI loan-to-value limits help. Koh flagged collateral valuation and speculative borrowing as concerns. Mahindra Finance's Raul Rebello said gold loans are now its second-largest category with low delinquencies. - Vehicle finance and rural stress: Rebello said rural demand outpaced urban in the first half but it is too early to call the full year. Shriram Finance's Umesh Revankar expects temporary pressure where farm incomes are weak, but no serious widespread problem. - Weather and oil: Koh named El Niño as a downside risk, not systemic for larger lenders. Sridharan warned a prolonged West Asia conflict and higher oil prices could weigh on the economy.

This fits with the RBI October bulletin discussed in our earlier piece on NBFC bank borrowings, which noted bank reliance rising and the RBI watching the linkage.

What risk teams can do

- Track funding concentration by source and rating sensitivity. - Stress-test refinancing under a one-notch downgrade. - Monitor gold-price moves against loan-to-value buffers. - For smaller NBFCs, build bank relationships early and document governance.

Key takeaways

- Fitch says large NBFCs are much stronger than in 2019, while smaller ones face a K-shaped, costlier funding market. - Ratings drive access: most NBFCs are rated A or below and depend mainly on banks and government bodies. - Watch household leverage near 45%, gold-loan collateral values and rural stress.

Sources

- [Business Standard: Larger NBFCs stronger than in 2019; risks remain, says Fitch's Elaine Koh](https://www.business-standard.com/specials/bs-events/larger-nbfcs-much-stronger-than-in-2019-but-risks-remain-elaine-koh-1261026012661.html) - [Business Standard: Fund diversification a lot harder for smaller NBFCs](https://www.business-standard.com/specials/bs-events/bfsi-summit-2026-fund-diversification-lot-harder-for-smaller-nbfcs-1261026015131.html)

Tags: NBFC Fitch gold loans NBFC funding credit risk