Infra recovery could accelerate NBFC growth after strong Q3 trends

NBFCs reported stronger Q3FY26 growth with margin expansion, lower credit costs and improved asset quality; a revival in infrastructure-linked activity could further support sector momentum into FY27

Non banking financial companies saw positive trends in the third quarter of fiscal 2026 (Q3FY26). Apart from improved portfolio quality, there is margin expansion in this stage of the cycle, as lower rates are translating into lower bond yields and hence, into lower cost of financing.

 

There has been significant asset under management (AUM) growth, and rural loans are doing better, given agricultural rebounds. This comes as there has been a slowdown in infrastructure-dependent segments, which gels with muted award activity and long payment cycles in infrastructure. Rural-focused companies with affordable housing exposures, or tractor loans among others could be beneficiaries.

 

Most asset classes have reported better growth, but infrastructure as mentioned above has seen a relative slowdown and small-ticket secured Micro, Small and Medium Enterprises (MSME) loans are continuing to see higher credit costs. Overall, credit costs dropped significantly across most sectors on a sequential basis.

 

Large players such as Bajaj Finance may be moving from chasing volumes in high risk unsecured segments to risk-adjusted growth strategies, running programs with enhanced loss given default (LGD) parameters to filter out high risk segments. This could reduce AUM growth rates while improving risk adjusted returns. Assuming monetary policy stays accommodative, NBFCs that can reduce cost of funds rapidly, may do better since policy rates are not expected to see major cuts in the near-term. Good treasury management could also ensure higher profits in the current monetary environment. 

 

Bajaj Finance guided for lower credit cost of 1.65-1.75 per cent in FY27, versus 1.9-1.95 per cent in FY26. The company took accelerated provisions. Results would have been better across the sector if adjusted for the one-off impact of the labour code. Asset quality improved across players as gross non performing assets (GNPA), slippages and write-offs moderated.

 

Overall, NBFCs may see acceleration in disbursements, continued net interest margin (NIM) expansion and a decline in stressed loans through the near term. Despite the change to risk averse strategies, most NBFCs expect better loan growth in FY27. Competition may lead to margin pressure.

 

NBFCs continued to report margin expansion in Q3FY26 and 9MFY26, due to falling cost of funds and transmission to floating rate loans, which is also pushing retail demand, along with near-term demand generated by GST reforms. The sector is in a reasonably sweet spot, with good overall growth and better asset quality. The Bajaj twins — Bajaj Finance/Finserv — may be big winners for example, alongside affordable players like Aptus, Aadhar and Home First.

 

Diversified NBFCs saw higher disbursement. Vehicle financiers had a good quarter with higher disbursement. NIMs expanded sequentially by 8-55 basis points across various sectors, supported by lower cost of funds, driving net interest income (NII) growth to over 20 per cent Y-o-Y, which was a significant improvement from around 15-16 per cent in Q2. Lower credit costs also supported return on assets (RoA) expansion. 

 

Diversified players may be best placed to manage growth through this phase of the asset-quality cycle given multi-segment exposure. In housing, players with higher rural and affordable exposure may outperform.

 

Among leading players, Bajaj Finance has management commentary regarding ‘incipient stress’ and is cutting back on MSME lending volumes. While guiding for overall lower credit costs, the company is cautious about this segment. Cholamandalam Investment and Finance has started to exit fintech partnerships and pulled back from the consumer & small enterprise loan (CSEL) segment.

 

Poonawalla Fincorp is using a write-off strategy to improve the balance sheet, accepting near-term earnings pressure. This is to address high credit costs of 2.6 per cent on an annualised basis from its legacy ‘Instant Consumer Loan’ portfolio which constitutes 17.8 per cent of AUM. 

 

Shriram Finance’s performance saw diverging trends. Its farm equipment portfolio grew approximately 37 per cent Y-o-Y, with an AUM increase of over ₹6,000 crore. But headline AUM growth was only 14.6 per cent since the construction equipment (CE) portfolio contracted 20.4 per cent Y-o-Y. 

 

Mahindra & Mahindra Financial Services has seen tractor financing disbursements increasing 75 per cent Y-o-Y to ₹3,242 crore. 

 

Sundaram Finance registered a record NIM of 8.1 per cent, with a 60 basis points Y-o-Y expansion that exceeded market expectations, due to reduction in the cost of funds to 6.03 per cent. But, it has seen deterioration in commercial vehicle financing. 

 

The sector is definitely benefiting from several positive factors and majors will enter FY27 with stronger balance sheets. A pickup in MSME and infra would be a bonus.