NBFC CRISIS IN INDIA: CAUSES, REGULATORY FAILURES, AND THE WAY FORWARD

Non-Banking Financial Companies (NBFCs) occupy an important position in India’s financial system by extending credit to households, small businesses, infrastructure projects and segments that may not be fully served by conventional banks. Their contribution is accompanied by vulnerabilities arising from maturity transformation, reliance on wholesale funding, concentration of exposures, governance weaknesses and interconnectedness with banks and capital markets. The defaults and distress associated with major entities, particularly Infrastructure Leasing & Financial Services Limited (IL&FS), Dewan Housing Finance Corporation Limited (DHFL) and Reliance Capital Limited, exposed the potential for entity-level weaknesses to transmit stress across the financial system. This paper examines the legal and regulatory framework governing NBFCs in India, analyses the causes of NBFC distress, and evaluates the regulatory response. It adopts doctrinal and analytical methods, relying on legislation, RBI directions, government materials, judicial decisions and selected case studies. It argues that NBFC crises cannot be explained exclusively as liquidity events: liquidity stress may reveal deeper problems in asset quality, funding strategy, governance, transparency and supervisory effectiveness. The paper considers the Reserve Bank of India Act, 1934, the scale-based regulatory framework, fraud risk management directions and the special insolvency framework for financial service providers under section 227 of the Insolvency and Bankruptcy Code, 2016. It concludes that India has strengthened its framework, but effectiveness depends on timely supervision, credible disclosures, board accountability, robust liquidity planning and coordinated resolution arrangements.