NBFCs: Strong But Not Picture-Perfect
Most pressure is on HFCs that are reeling under competitive pressure.
FinTech BizNews Service
Mumbai, 06 October, 2026: The latest Kotak Institutional Equities, Kotak Securities, report on Diversified Financials provide the updates and outlook for the NBFC sector:
NBFCs reported picture-perfect performance in the last two quarters with high growth, strong asset-quality performance in most segments and improving margins. We see the strength continuing in 2QFY27, performance/management commentary may be colored by monsoon vagaries that played toward the end of quarter, rising rates hurting incremental funding costs, base effect of higher vehicle sales setting in 2H and recent regulatory draft proposals (ban on flexi/revolving credit and lower insurance commissions). Urban businesses (home loans amid yield pressure, personal loans and high-ticket MSME loans) are holding on well, driving a blockbuster performance. Valuations have corrected sharply, likely reflecting the aforesaid factors. Bajaj Finance and Bajaj Finserv remain our favored picks, with Aadhar and Home First among the affordable HFCs.
A strong quarter
2QFY27 will be another strong quarter for NBFCs, with 12-43% growth in core PBT for most (Five Star and LICHF are an exception due to sluggish growth) driven by 15-37% yoy (3-7% qoq) loan growth on the back of strong disbursements and momentum in the last four quarters. The sharp decline in cost of funds (yoy) amid some qoq rise, reflecting rising incremental cost of funds, has been the key driver supporting reducing yields. NII growth, in most cases, is similar or a tad lower than loan growth. Credit cost remains benign, with a marginal qoq rise in 2Q for most, though down yoy. Cost/AUM ratios are holding on well.
Urban India, with strong growth in home loans, cars, consumer durables, personal loans and higher-ticket LAP/MSME loans is holding on well—this is driving strong performance for Aditya Birla Capital, Bajaj Finance and Tata Capital. Gold loans remain strong, following a 3% qoq rise in gold prices.
Rural/CV plays continue to do well for most of the quarter, following from 1Q strength. NBFCs such as MMFS did not reflect seasonal weakness in 1Q, while Chola was able to curtail the same; Shriram’s credit cost remains a tad lower yoy in 1QFY27. While most of 2Q was strong as well, vagaries in the monsoon likely affected performance toward the end of quarter.
Some challenges/risks in outlook
Floods in the north, droughts in parts of Maharashtra and Karnataka and some weakness in MP have likely tempered quarter-end momentum. Cumulative rainfall in India was 13% below the long-term average until September 25, while sowing status was marginally lower. More importantly, reservoir levels remained in deficit mostly in the north/east. We expect this weakness to either marginally reflect in 2Q performance or temper management outlook.
CV/auto sales enjoyed tailwinds post GST cut and cyclical improvements. With a high base of 2H, overall disbursement outlook will likely moderate a bit; tractor sales have already followed suit. Most vehicle finance companies have diversified anyway and, hence, are less affected by a slowdown in vehicle sales.
Flexi loans and insurance fees
The RBI has proposed a ban on flexi loans and revolving facilities; this largely affects the businesses of ABCL, Bajaj and Tata; these players have low-single digit/low-double digit exposures, but nevertheless any loss of business will have to be offset elsewhere, if these companies have to sustain their high (~25% loan growth).
The IRDA has proposed to reduce fees on credit protect to negligible levels; there was no cap earlier, with insurance fees as high as 50% earlier. Exhibit 24 shows the contribution of insurance fees to PBT and ratio with AUMs.. For concerned companies, LTF, Chola, followed by others, we expect discussions to be dominated by offsetting factors such as the sale of individual term policies or change in fees/lending rates.
Rising rates augur well for HFCs, pressure start building for NBFCs
We expect NIM to remain broadly stable/marginally down qoq. Trends in yields will be the key driver; cost of funds has inched up marginally for most players, with an increase in incremental cost of funds. Most pressure is on HFCs that are reeling under competitive pressure. On the positive side, the increase in the share of unsecured/PL/retail over corporate loans augurs well for margins. In addition, most companies carried excess liquidity in 1Q, which did rundown post June.
Our economist expects a 25 bps rate hike in the October policy with overall hikes of 50-75 bps. Bond (10-year Gsec) yields have increased by 44 bps during the quarter, with 49/53 bps hike from Jan/Feb levels. Incremental cost of borrowings for most, slowly driving overall cost; the impact is higher in prime/AAA entities. Shriram, due to a rating upgrade, is the only exception to this. HFCs will see immediate repricing up of assets (linked to repo) with Bajaj Housing and LICHF (in the coverage universe) as key beneficiaries.
Asset quality—holding on well
We expect the headline asset quality ratio to be stable/hold on well. Most of the quarter was similar to 1QFY27, with some weakness emerging in rural/sub-prime segment in the last week of the quarter due to vagaries of the monsoon. Guidance, in this backdrop, may be a tad conservative versus 4QFY26/1QFY27. A rise in gross stage-2+3, at segmental levels for tractors/CVs/rural MSMEs is not ruled out even as credit cost may remain stable/inch up marginally.
