GST 2.0, rural recovery may boost prospects for vehicle financiers

GST 2.0, a reviving rural economy and chances of further interest rate cuts could trigger an upswing in demand for automobiles. In turn, that may lead to improved prospects for non-banking financial companies (NBFCs) with large vehicle finance portfolios. 

 

Vehicle finance demand has been muted and asset quality stressed in the financial year 2026 (until August). But GST reforms will lower vehicle prices by 7-8 per cent for PVs and CVs. As such, NBFCs like Shriram Finance, Cholamandalam and Mahindra & M Finance, L&T Finance, which have high vehicle exposures could see a boost.

 

Going forward, net interest margins (NIMs) may improve as rate cuts flow through and hence, net interest income or NII growth should also improve in the second half of the financial year 2026 (H2FY26).

 

Smaller PVs and two-wheelers are the biggest winners, with 8 per cent price cuts and hopes of double-digit demand boost. Internal combustion vehicles gain since the tax differential versus EVs is reduced. Vahan registrations during Apr-Aug ’25 were muted for two-wheelers (2Ws) and personal vehicles (PVs) with 1.5-2 per cent year-on-year (Y-o-Y) growth, while MHCVs declined 3 per cent. Tractors have a stronger 11 per cent Y-o-Y growth.

 

The reduction came into effect from September 22, which means the impact will be felt in festival season when the bulk of buying occurs. However, it remains to be seen how much inventory must be liquidated. Auto manufacturers and dealers may have to absorb a hit on higher-priced inventory. This may be a cumbersome process through Q3FY26.

 

Vehicle financiers saw a soft Q1FY26 quarter with weaker disbursement growth of 6 per cent Y-o-Y in Q1FY26 vs 9 per cent in Q4FY25 and moderation in AUM growth at around 18 per cent Y-o-Y versus 20 per cent Y-o-Y in Q4FY25. Chola and MMFS saw flat disbursement growth while Shriram’s disbursement growth moderated to 11 per cent Y-o-Y in Q1FY26. Disbursements and AUM growth should pick up in H2FY26.

 

When vehicle financiers reported on Q1FY26 results, managements said the macro environment had not improved. However, agri growth has been good and rural and semi-urban demand may ride that through the festival season. This will also benefit used vehicles sales.

 

Cholamandalam Finance reported softness in asset quality in Q1FY26, especially in vehicle finance and consumer & small enterprise loan (CSEL) segments. Credit costs in the CSEL portfolio may remain high but the vehicle finance book should improve in H2FY26. Chola’s presence spans new and used vehicle segments including CVs, PVs, two-wheelers, three-wheelers, and tractors. Margin improvement should be there to support earnings through H2FY26, though asset quality improvement in CSEL and vehicle finance will also be key.

 

Shriram Finance (SFL) has also seen weakness in asset quality, with Stage 2 (GS-2) loans rising over the last three quarters. A GST rate cut, which reduces prices of new PVs and CVs, also leads to a decline in prices of used vehicles. SFL has good provision coverage across its Stage 1, Stage 2, and Stage 3 assets, even if used vehicle prices drop 4-5 per cent. Additionally, its focus on financing vehicles aged 5-10 years mitigates risk, as most depreciation for vehicles occurs in the first five years. But SFL has very high liquidity, which has put pressure on margins. As liquidity normalises over the next 2-3 quarters, margins should improve.

 

Mahindra Finance (MMFS) has a strong presence in the new vehicle financing segment, with pre-owned vehicles accounting for less than 15 per cent of assets. Around 44 per cent of MMFS’ loan book is linked to assets of parent Mahindra & Mahindra (M&M), whose portfolio is largely SUV-focused, limiting upside from entry-level and mid-segment vehicles where the most demand surge may appear on GST 2.0. Strong agri performance seems to translate into better results for MMFS and tractors have seen demand lifting too on a combination of good farm sector returns and GST rate cut. This is favourable for MMFS. 

 

L&T Finance (LTF) also has a high share of high-yielding and volatile credit costs segments such as MFI, 2-wheeler loans and tractors (54 per cent of AUM as on Jun-25). The vehicle and tractor segments should be beneficiaries.