Huge inflows in small spaces

Something remarkable is happening in India's financial sector. Global capital is increasingly finding its way not just into large corporations and infra projects, but also into institutions that finance small shopkeepers, first-time homebuyers and aspiring entrepreneurs. This could be one of the more consequential developments in India's journey towards becoming a developed economy.

Japan's Mitsubishi UFJ Financial Group (MUFG) has invested in Shriram Finance, Abu Dhabi's International Holding Company (IHC) has backed Sammaan Capital, Bain Capital has committed to Manappuram Finance, and Blackstone has agreed to invest ₹5,000 cr in IIFL Finance. These investments reflect growing international confidence in India's specialised lending institutions and potential to deliver sustainable, profitable growth.

NBFC crises of the late 1990s and 2018 exposed vulnerabilities in governance, liquidity management and funding structures. Each episode prompted regulatory reforms and greater institutional discipline.


Regulatory trust RBI has progressively strengthened capital adequacy, provisioning, liquidity, governance and supervisory requirements. Its scale-based regulatory framework has brought greater scrutiny to larger institutions.

Meanwhile, leading NBFCs have evolved from entrepreneur-driven businesses into professionally-managed organisations with substantial balance sheets, independent boards, diversified funding and sophisticated risk-management systems. The result is a sector better equipped to pursue sustainable growth, even as credit, liquidity and governance risks demand constant vigilance.

DPI doors Aadhaar, digital KYC, UPI and the account aggregator framework have created capabilities that few countries possess at comparable scale. Traditionally, assessing borrowers with irregular incomes and limited financial documentation required extensive physical verification, manual processes and subjective judgement.

Today, consent-based financial data, digital transaction histories and AI can make underwriting faster, more accurate and less expensive. AI-enabled systems can also identify inconsistencies and potential fraud that would be difficult or costly to detect manually.

MSME headroom Despite decades of policy support, India's MSMEs contribute about 30% of GDP. Their contribution is substantially higher in economies like China and South Korea, although statistical definitions differ. This gap reflects multiple structural factors. But inadequate access to affordable finance remains an important constraint.

India's favourable demographics, rising aspirations and relatively low formal credit penetration create considerable headroom for expansion. A small manufacturer needs working capital, a retailer needs inventory, a transporter needs another vehicle, and a family may need financing for its first home. These are modest requirements individually. But, collectively, they represent an enormous economic opportunity.

Specialised NBFCs are particularly well-positioned to facilitate this process. Their understanding of local markets and unconventional income profiles complements banks' deposit franchises and funding capabilities. Policymakers and regulators increasingly recognise this relationship, with RBI's clearer co-lending framework creating opportunities for collaboration while preserving accountability and customer protection.

For international investors, the proposition is commercially attractive and strategically meaningful. They can partner with established institutions to participate in India's long-term growth, supported by improving governance, technology and regulatory oversight.

For India, with its substantial investment requirements and structural CAD, such capital is especially valuable. Long-term foreign equity strengthens domestic financial institutions without creating foreign debt repayment obligations. Through NBFCs, it can reach the grassroots economy rather than remaining concentrated in large, capital-intensive projects.

The next priority is to complement equity inflows with deeper corporate bond markets, diversified long-term funding, efficient overseas borrowing arrangements and risk-sensitive regulation. These measures can lower funding costs and, ultimately, make credit more affordable.

That would be a remarkable win-win: rewarding investors, while helping build a more inclusive, resilient and prosperous India.

The writer is founder-MD, IIFL Finance.