Strong Q4 boosts NBFCs, but near-term risks temper optimism for FY27 growth

Asset quality improved and earnings strengthened in Q4FY26, but rural stress, microfinance exposure, West Asia tensions and monsoon risks could weigh on NBFCs in FY27

The Q4FY26 results were broadly encouraging for non-banking financial companies (NBFCs), with improvement in asset quality and earnings upgrades. Analysts expect steady growth for FY27, but there are some concerns about rural-linked portfolios, small-ticket loan against property (LAP) and microfinance exposures in West Bengal and Gujarat.

 

The final RBI norms for Upper Layer (UL) classification of NBFCs align with the draft, simplifying UL classification to an asset threshold of ₹1 trillion and above, and including government-owned NBFCs and infrastructure finance companies (IFCs) under UL. The RBI has relaxed connected counterparty limits for NBFC-UL IFCs to 45 per cent of Tier-I capital from the current 35 per cent. Large IFCs and Middle Layer power financiers may move to UL with a tighter cap versus the existing 50 per cent cap. Existing breaches above 45 per cent can continue till maturity. Most large group exposures are within the 45 per cent limit (REC is at 15 per cent, PFC at 24 per cent).

 

Credit offtake improved in March 2026. Non-food bank credit growth was at 15.9 per cent year-on-year (Y-o-Y), compared with 11.0 per cent in March 2025. While comparison is difficult due to changes in the fortnightly reporting framework, growth seems broad-based.

 

There is traction in personal loans, particularly vehicle financing. Growth in gold loans surged 123.1 per cent Y-o-Y. Partly, this was due to the reclassification of 20 per cent of agri-gold loans into the retail segment. The increase in gold prices has also inflated the value of gold-backed loans.

 

Tensions in West Asia continue to pose risks for export-oriented MSMEs. The government has approved the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0. MSME credit continued to grow faster than lending to large industries.

 

Bank lending to NBFCs was up, with outstanding credit reaching ₹20.65 trillion by March-end, accounting for 9.7 per cent of bank credit. The momentum reflects NBFCs' shift to bank funding. Asset quality improved at most large NBFCs and assets under management (AUM) grew at high teens or better. Net interest margin (NIM) expansion was driven by a lower cost of finance.

 

Among majors, Sundaram Finance (SUF), Mahindra & Mahindra Financial Services (MMFS), HDB Financial Services and Cholamandalam Investment & Finance Company (CIFC) posted sharp quarter-on-quarter (Q-o-Q) declines in gross non-performing assets (GNPAs). Bajaj Finance (BAF), MMFS and CIFC have all built management overlays aggregating ₹560 crore to protect against West Asia tensions and poor monsoon risks.

  SUF has the best credit cost of 60 basis points and expanding NIMs, and a fully secured book, although it has taken a hit due to a loss at Royal Sundaram General Insurance and an AUM drawdown at Sundaram AMC.

 

Diversified financiers such as BAF, HDB and Poonawalla grew faster at an aggregate 23 per cent Y-o-Y (5.3 per cent Q-o-Q), while vehicle financiers such as CIFC, Shriram Finance (SHFL), MMFS and SUF grew at around 16 per cent Y-o-Y (4.5 per cent Q-o-Q). Cost of funds (CoF) declined Y-o-Y across the board, ranging from 32 basis points (Poonawalla) to 187 basis points (BAF), driving NIM expansion.

 

Managements across companies cautioned that further CoF benefit is limited since bond yields are hardening. West Asia geopolitical tensions and a poor monsoon remain near-term risks, especially to rural and semi-urban credit demand.

 

Q4FY26 was a seasonally strong quarter, producing broad GNPA improvement. Credit costs also moderated Q-o-Q at most companies. Credit costs at BAF declined to 165 basis points from 191 basis points in Q3FY26, while at CIFC they declined to 150 basis points from 170 basis points, and at HDB they declined to 235 basis points from 250 basis points. MMFS saw an increase to 150 basis points from 130 basis points. Despite this, some large companies built precautionary overlays to cushion possible stress.

  Personal loan growth saw vehicle loans as the primary driver, while credit card lending slowed. Mortgage growth was steady at 11.5 per cent Y-o-Y. Vehicle loans grew 18.6 per cent Y-o-Y compared with 8.6 per cent a year ago, supported by the GST rate cut and consumer sentiment. Credit card outstanding grew 3.5 per cent Y-o-Y compared with 10.6 per cent in March 2025.

 

Auto financiers did well. CIFC saw NIM expansion, AUM growth of over 20 per cent and improved asset quality. SHFL reported profit growth of 41 per cent Y-o-Y (Rs 3,014 crore). MMFS posted net profit growth of 55 per cent Y-o-Y (Rs 873 crore). NIMs expanded, with SHFL at 8.61 per cent (up 36 basis points Y-o-Y), Chola at 8.4 per cent (up 40 basis points Y-o-Y) and MMFS at 7.5 per cent (up 100 basis points Y-o-Y).

 

Given the war through Q1FY27, the possibility of another flare-up and poor monsoon forecasts, near-term caution would be prudent. Diversified financiers with cross-segment exposure may fare better than focused lenders.