Tata Capital Business Model Review

Tata Capital Ltd., the third largest diversified NBFC in India, has filed its DRHP with SEBI. The company aims to go public through an IPO, comprising a fresh issue of up to 21 crore and an offer for sale of up to 26.58 crore equity shares.

Finology Research Desk has analysed the company this week, providing an analysis of its IPO. Find out in this article.

What makes the NBFCs special?

The Indian systemic credit market (total amount of credit provided through the entire financial system, including banks, NBFCs, as well as capital markets) was valued at Rs 232 lakh crore in FY25, and is expected to grow at a CAGR of  ~13% reaching Rs 334 lakh crore by FY28. This growth is being driven by rising internet and smartphone penetration, rapid urbanisation, digital and fintech innovations, and increasing demand for retail credit across housing, vehicle and consumer finance.

Source: DRHP

More systemic credit usually means businesses and households are borrowing and spending more, while less systemic credit can signal tighter financial conditions.

In terms of market share, as of FY25, Banks account for about 72% of the systemic credit market, NBFCs hold around 21%, while commercial paper, corporate bonds, and external borrowings together made up the remaining 7%.

Source: DRHP

The systemic credit market is broadly segmented into retail credit (which includes housing finance, vehicle financing, gold loans, education loans, personal loans, and credit cards) and non-retail credit (comprising lending to corporates and MSMEs). As of FY25, retail credit dominates the systemic credit market with a market share of 64% whereas non-retail credit accounts for 36%.

Non-banking financial companies (NBFCs) have emerged as a key pillar of India’s financial system, offering both retail and non-retail lending. Between FY23 and FY25, NBFC credit growth consistently outpaced both nominal GDP and banking credit, highlighting their increasing role in India’s lending landscape. In FY25, NBFCs' credit grew at 18%, well ahead of the banking sector’s 11% rise.

 

Source: DRHP

The AUM of NBFCs stood at around Rs 48 lakh crore in FY25 and is expected to reach Rs 74 lakh crore by FY28, growing at a CAGR of 15%. This growth is primarily driven by the convenience and speed offered by NBFCs, along with rising demand for retail credit.

 

 

Source: DRHP

As of 31 December 2024, the Reserve Bank of India (RBI) had registered 9,291 NBFCs. These are broadly categorised into two types. Deposit-taking NBFCs (NBFCs-D) can accept fixed deposits from the public, while non-deposit-taking NBFCs (NBFCs-ND) cannot.

To strengthen supervision, the RBI introduced a scale-based regulatory framework in 2021. Under this system, NBFCs are classified into four layers based on size, complexity, and systemic importance. 

 

Source: KPMG Report

• Base-layer NBFCs are smaller and lower-risk, subject to lighter regulation. 
• Middle-layer NBFCs are medium-sized with moderate risk and face stricter oversight. 
• Upper-layer NBFCs are large with significant financial exposure and must comply with comprehensive governance, risk management, and reporting standards.
• Top-layer NBFCs are systemically important and subject to the highest regulations to protect the overall financial stability. 

In 2022, Tata Capital was classified as an upper-layer NBFC by the Reserve Bank of India, which requires such entities to list on the stock market within three years. This three-year deadline expires this September, and that is why Tata Capital is set to launch its IPO.

This layering of NBFCs allows the RBI to focus on entities that pose higher risk while easing compliance for smaller firms.

With strong credit growth and expanding services, NBFCs are expected to continue outpacing overall systemic banking credit growth through FY26, further strengthening their role in India’s financial ecosystem.

Business model of Tata Capital

Founded in 2007, Tata Capital is the third-largest diversified NBFC in India.It is engaged in the business of providing retail financial products such as personal, home, and vehicle loans, credit cards, insurance, and loans against property, along with SME and corporate finance solutions. The company is also active in equipment leasing and infrastructure finance across sectors. In addition, it provides wealth management, investment advisory, private equity, and investment banking services, serving both retail and institutional customers across its segments. Headquartered in Mumbai, it operates through 1,496 branches across India.

 

 

Source: DRHP

Revenue Mix of Tata Capital

 

 

Source: Annual Report FY25
 

Tata Capital’s consolidated revenue from operations stood at Rs 28,313 crore in FY25, with 98.6% coming from Indian customers and 1.4% from Singapore, reflecting limited international exposure. The detailed revenue breakdown is as follows:

• Interest income: This is Tata Capital’s main source of revenue, contributing about 90.84% in FY25. It includes interest earned from loans to retail & corporate clients as well as from fixed income investments, reflecting the company’s strong position in the financial services sector.

• Fee and commission income: This includes fees earned from advisory services, commission on financial products like mutual funds or insurance, credit card fees, etc. Accounting for 6.29% of total operating revenue, this segment, though smaller than interest income, reflects Tata Capital’s diversified financial services beyond lending.

• Other income, including rental income, dividend income and gains from the sale of financial assets, made up the remaining 2.87% of the company’s total revenue.

Porter’s five forces analysis of Tata Capital

 

 

Source: Finology research desk

1. High bargaining power of customers: Customers today can easily compare loan rates, processing fees, and terms across NBFCs and banks using digital platforms. Switching costs are low, with refinancing options widely available. For corporate and SME clients, competition is even stronger, as multiple lenders compete for the same business. Tata Capital benefits from a strong brand reputation, pan-India presence, and cross-selling within the company, but borrowers can still shift quickly given better rates and terms. As a result, customer bargaining power is high.
    
2. Moderate bargaining power of suppliers: Tata Capital, like other NBFCs, funds its lending operations through borrowings from banks and other financial institutions, which ultimately makes it sensitive to interest rate changes; when the RBI raises repo rates, borrowing costs increase, which can compress profit margins if lending rates are not adjusted. Though Tata Capital benefits from strong credit ratings and brand credibility, which allow it to borrow at lower costs than smaller NBFCs, capital providers still retain moderate influence. For example, when IL&FS defaulted on several debt obligations in 2018, it triggered a liquidity crisis that affected the entire NBFC sector. Many NBFCs faced higher borrowing costs and tighter access to funds, demonstrating that even large, established NBFCs are vulnerable when capital availability is constrained.
    
3. High competition in the industry: Tata Capital faces intense competition from other large NBFCs as well as traditional banks. On the NBFC side, Bajaj Finance, Shriram Finance, Cholamandalam Investment & Finance Co., etc, dominate consumer and SME lending. Among banks, SBI, HDFC, ICICI, Axis Bank, etc, compete directly across loan categories. Since most lenders provide similar products, competition is driven mainly by pricing, service speed, and brand trust, which keeps the rivalry intense.
    
4. Moderate threat of substitutes: NBFC lending faces substitutes like bank loans and credit cards, while fintech options such as peer-to-peer lending are becoming popular for smaller loans. However, for large secured loans such as housing loans , borrowers usually prefer established NBFCs or banks, as newer substitutes lack the scale and credibility required. As of June 2025, public sector banks held a 46.2% share of new home loans by value, private banks accounted for 28.2%, and while other lenders, including NBFCs, Housing Finance Companies, small finance banks, etc, collectively made up just 25.6%, showing that traditional banks still dominate the housing segment.
    
5. Moderate threat of new entrants: The NBFC sector in India is regulated by the RBI, which mandates a license, requiring minimum capital requirements (net owned funds of Rs 10 crore), loan exposure limits, and compliance standards to commence operations. These requirements make it difficult for small players to enter the market easily. However, large NBFCs with substantial financial resources continue to pose a substantial threat.

Key strengths and weaknesses of Tata Capital

Strengths:

1. Third-largest diversified NBFC in India: Tata Capital is the third-largest diversified NBFC in India by total gross loans, backed by a diverse lending portfolio of over 25 products across retail, SME, and corporate segments, with no single lending product contributing more than 20% of total gross loans in FY25.

2. Strong credit rating and diverse funding access: Tata Capital holds a AAA/stable rating from all major domestic agencies, which allows it to raise funds at competitive rates. As of FY25, no single lender accounted for more than 10% of total borrowings, highlighting a well-diversified funding base across both domestic and global lenders.

3. Omni-channel distribution network: The company has an extensive omni-channel distribution network, with 1,496 branches across 1,102 locations in India, complemented by digital platforms including its website and mobile app, which provides a wide market reach and ease of accessibility to customers.

Weaknesses:

1. Rising NPAs and lower provisioning: Tata Capital’s asset quality has weakened in recent years. Gross Stage 3 Loans have been rising, standing at 1.9% of total loans in FY25, up from 1.5% in FY24 and 1.7% in FY23, while the provision coverage ratio slipped to 58.5% in FY25 from 77.1% in FY23. At the same time, loan write-offs jumped by 257% from Rs 505 crore in FY24 to Rs 1,803 crore in FY25. This trend suggests growing credit risk as potential customer defaults, combined with reduced provisions and increased write-offs, could adversely impact the company’s operations, cash flows, and financial stability.

2. Rising cost of borrowing: Tata Capital’s average cost of borrowing rose to 7.8% in FY25 from 6.6% in FY23. A further increase or any downgrade in credit ratings could limit its ability to access funds on favourable terms, putting pressure on the overall financial performance.

The bottom line

Tata Capital has grown into one of India’s leading diversified NBFCs, backed by its wide product portfolio, strong credit profile, and extensive omni-channel presence. While its rapid expansion has strengthened its market position, rising credit costs and asset quality deterioration remain critical concerns. With its IPO just around the corner, the real test is whether Tata Capital will be able to balance growth with sustained profitability in the future while keeping credit costs and NPAs under control. What are your thoughts?