The landscape for Non-Banking Financial Companies (NBFCs) in India is beginning to show promising signs of recovery, largely due to easing macroeconomic pressures and supportive measures from the Reserve Bank of India (RBI). According to insights from Jefferies, the sector is on track for growth thanks to improvements in asset quality, enhanced liquidity, and favorable interest rate developments.

Positive Macroeconomic Environment

The overall economic conditions are becoming more favorable, marked by increased government spending and strategic RBI interventions aimed at easing liquidity constraints. One notable move by the central bank was the recent reduction in risk weights for bank lending to NBFCs, which paves the way for better funding access, especially for smaller players in the sector.

• Recent Developments:
  • A 25-basis-point cut in interest rates could enhance net interest margins (NIMs) for NBFCs.
  • Asset quality indicators are stabilizing, with recent months showing improved collection rates.

Stabilization of Asset Quality

While the gross non-performing assets (GNPA) ratio may see a minor uptick in the first quarter of FY26, the expected rise is anticipated to be less severe than previous years. However, challenges remain, particularly for the microfinance institutions (MFIs), which are facing difficulties, especially in Karnataka due to a new microfinance ordinance affecting collection efficiency.

• Key Insights:
  • The transition to MFIN 2.0 regulations in April 2025 could further strain MFIs despite some improvements observed in other regions.
  • The overlap of NBFC exposure to MFIs is most significant in areas such as:
  • Gold loans (9%)
  • Small-ticket loans (6-7%)
  • Affordable housing (4-5%)
  • Two-wheeler loans (2%)
  • Commercial vehicle loans remain largely unaffected by these pressures.

Mixed Trends in Vehicle Financing

The vehicle financing sector is witnessing a mix of trends. Demand for light commercial vehicles (LCVs) is on the rise, while medium and heavy commercial vehicles (MHCVs) are experiencing a slowdown due to increasing competition and subdued demand.

Affordable Housing Sector Dynamics

The affordable housing finance sector is also showing steady disbursement levels, though aggressive competition from larger players is creating some pricing challenges. Following the RBI’s recent interest rate cut, public sector banks have reduced home loan rates to around 8.1-8.2%, though private banks have yet to adjust their rates accordingly.

• Market Positioning:
  • Larger housing finance companies (HFCs) with fixed liabilities might face NIM pressure, making affordable housing finance companies (AHFCs) a more attractive option due to their superior pricing flexibility.
  • Among AHFCs, Home First Finance is regarded as a standout choice.

NBFC Stocks Performance

Despite a downturn of 3-41% from their six-month highs, leading retail and auto-focused NBFCs have managed to outperform the broader market, indicating a potential recovery trajectory. This resilience reflects the sector’s capacity to adapt and thrive amid changing economic conditions.

In conclusion, while challenges persist, the outlook for NBFCs appears more optimistic as macroeconomic conditions improve and strategic policy adjustments take effect.