Mumbai, July 22 -- As banks grow more cautious on unsecured loans on the back of increased regulatory oversight, non-bank financiers may be rushing in to fill the gap, pushing more personal loans. Although non-banking financial companies (NBFCs) cater to slightly different customer categories, such as those with weaker credit scores, self-employed people and those without salary income, data from a credit bureau showed they have gained market share from banks in this segment. A personal loan is an unsecured credit product, meaning borrowers don't need to provide any collateral, and is categorized as a consumption loan. After the central bank tightened lending norms for higher-risk categories in 2023, banks decided to go slow on advancing such loans. The aggregate market share of outstanding personal loans held by banks-both private and public sector-fell 260 basis points (bps) to 70% in FY25 from 72.6% in FY24, whereas the market share of NBFCs increased by 160 bps to 23.5% in FY25 from 21.9% in FY24, according to data from credit bureau Crif High Mark. The remaining market share was held by other financial institutions including cooperative banks and small finance banks. The Crif data showed that NBFCs increased their share in personal loan originations by value to 36.4% in FY25 from 32.2% in FY24. Originations refer to the process of onboarding customers, doing due diligence and assessing their credit eligibility. The share of private banks in personal loan originations decreased to 29.2% from 29.8% during the same period. India's public sector banks held 31% of the market share in FY25, although their share also declined from 33.6% in FY24. According to Rohit Patwardhan, chief credit officer at HDB Financial Services, the NBFC owned by HDFC Bank, India's largest private sector lender, the rise in personal loans reflects a structural shift in the economy. "There is a growing move toward a consumption-driven economy. NBFCs have built their personal loan portfolios by targeting borrowers in tier-2 and below cities through lower ticket-size loans," said Patwardhan. Banks continue to focus on salaried, middle-aged borrowers in tier-1 cities and this divergence in strategy has allowed NBFCs to cater to a wider and often underserved customer base, he said. HDB Financial Services had assets of Rs.1.09 lakh crore under management at end-June. Patwardhan said NBFCs are not taking undue risks despite the unsecured nature of these loans. "We maintain strict credit assessment practices and leverage technology such as artificial intelligence (AI) and big data analytics for accurate risk profiling. This helps mitigate the risk of over-indebtedness," he said. Kunal Varma, chief executive officer and founder of Freo, a digital banking platform that has an NBFC licence, said non-bank lenders have increased their market share by targeting borrowers often ignored by banks, especially those who earn low income or are new to credit. Banks, said Varma, have been more cautious in these segments. "The digital-first and quicker loan disbursement, minimal documentation, flexible underwriting, and scalable model make NBFCs more accessible, particularly in tier-2 and tier-3 cities," he said. According to Varma, NBFCs reduce risk by using several layers of underwriting that incorporate credit bureau scores, income verification, spending habits, and even behavioural information....