The Non-Banking Financial Companies (NBFC) sector in India is showing signs of improvement as macroeconomic challenges ease and the Reserve Bank of India (RBI) adopts a more supportive stance.
According to Jefferies, key indicators such as asset quality, liquidity, and interest margins are stabilising, setting the stage for steady growth.
Government initiatives and increased spending, coupled with the RBI’s move to reduce risk weights on bank lending to NBFCs, are improving access to funds, particularly for smaller players in the sector.
The central bank’s recent 25-basis-point interest rate cut, along with the possibility of further reductions, is expected to support net interest margins across the industry.
Asset quality has been stabilising across key segments, with collection efficiency improving in recent months. While gross non-performing assets (GNPA) may see a slight rise in the first quarter of FY26, the increase is expected to be lower compared to the previous year.
However, the microfinance segment continues to face stress, particularly in Karnataka, where a microfinance ordinance has impacted collection efficiency.
Despite some recovery in other states, the upcoming transition to MFIN 2.0 regulations in April 2025 could add further strain to microfinance institutions. However, the impact of unsecured microfinance loans on secured loan products remains limited.
The highest overlap of NBFC exposure to the microfinance sector is seen in gold loans (9 per cent), small-ticket loans such as micro LAP/PL (6-7 per cent), affordable housing (4-5 per cent), and two-wheeler loans (2 per cent), while commercial vehicle loans remain largely unaffected.
The vehicle financing segment is witnessing mixed trends. Demand for light commercial vehicles (LCVs) is showing signs of improvement, whereas medium and heavy commercial vehicles (MHCVs) continue to struggle due to subdued demand and rising competition.
Affordable housing finance remains a strong segment, with steady disbursements. However, some pricing pressure is emerging due to aggressive competition from larger financial institutions.
Following the RBI’s recent rate cut, public sector banks have lowered home loan rates to 8.1-8.2 per cent, though private banks have yet to adjust their rates.
Larger housing finance companies with fixed liabilities may face margin pressure, making affordable housing finance companies (AHFCs) a more attractive option. Among them, Home First Finance has been identified as a top performer.
While NBFC stocks have seen a decline of 3-41 per cent from their six-month peaks, top large retail and auto-focused NBFCs have outperformed the broader market.
With the RBI’s continued support and improving economic conditions, the sector is expected to remain resilient in the coming months.
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