NBFCs to see strong 1HFY27 despite margin pressure from higher funding costs: Report
New Delhi, October 6
India's non-banking financial companies are expected to report a strong first half of FY27, supported by sustained credit growth and resilient asset quality, despite near-term margin pressure from higher borrowing costs, according to a report by Emkay Research.
The report highlighted that healthy credit demand continues to support sector-wide growth. Retail lending remains strong, driven by robust disbursements across urban consumption, SME and gold loans, despite festive-season disbursements being largely pushed to the third quarter.
Mortgage and housing loans also continue to record double-digit growth, while healthy auto and trade credit demand has offset weaker disbursements in rural tractor and farm financing.
On the operational front, companies continue to invest in technology and manpower to strengthen capabilities, which Emkay expects to support steady growth in core operating profits.
However, margins across the NBFC and HFC space to witness some "compression, largely driven by an elevated CoF, coupled with stable-to-moderating asset yields."
Emkay expects most NBFCs to see spreads contract by around 5-15 basis points.
It noted that, despite the pressure on margins, asset quality has remained resilient, with most NBFCs and HFCs expected to report broadly stable-to-improving metrics in the second quarter of FY27.
"Aided by sustained collection efficiencies, tighter underwriting guardrails, and regular resolution of some legacy stress, we expect credit costs to either register sequential decline or stabilize across the board," it said.
Emkay said NBFCs and HFCs enter the second half of FY27 on a strong footing, backed by healthy balance-sheet expansion and robust disbursement momentum. While drought conditions emerged in some regions late in the quarter, their delayed onset is unlikely to have had a significant impact on second-quarter credit performance.
Looking ahead, however, margins and fee income could come under pressure from elevated funding costs, an expected RBI rate hike in the second half, revised insurance commission norms and geopolitical tensions in West Asia.
Within the sector, housing financiers are expected to maintain robust mortgage disbursements and stable asset quality, although liability-side pressures could weigh on net interest margins. Diversified and vehicle-focused NBFCs are also expected to report strong assets under management (AUM) growth, with improving credit metrics supporting core profitability.
Overall, NBFCs are expected to see a "strong 1H, driven by sustained credit growth momentum and broadly stable-to-improving asset quality in 2QFY27, even as near-term margins moderate due to an elevated CoF tracking higher benchmark yields."
— ANI
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