Non-Banking Financial Companies (NBFCs) experience subdued growth in Q1 due to reduced lending and increased defaults.

Non-Banking Financial Companies (NBFCs) experience subdued growth in Q1 due to reduced lending and increased defaults.

Indian non-banking financial companies (NBFCs) are bracing for subdued earnings in the first quarter of the fiscal year 2026 (Q1 FY26), particularly in the vehicle finance and microfinance segments. This is due to a combination of factors such as slower loan disbursements, higher credit costs, regulatory pressures, and challenges in collections that have slowed recovery for these specific sectors.

The slowdown in loan disbursements and ongoing asset quality concerns are weighing on earnings, especially in vehicle finance and secured micro, small, and medium enterprises (MSMEs). For microfinance institutions (MFIs), additional pressure arises from higher credit costs and seasonal softness, compounded by regulatory constraints from the Microfinance Institutions Network (MFIN), leading to a difficult quarter for the segment.

Although the cost of funds for auto financiers is moderating, which could improve margins slightly, overall operating expenditures remain elevated due to investments in digital transformation and new business verticals. The collection trends, which had been improving earlier, deteriorated during the April-June quarter, further impacting asset quality and earnings for vehicle finance and microfinance NBFCs.

However, other NBFC segments like diversified financials and housing finance companies are expected to see relatively better momentum. These segments are expected to benefit from more stable credit costs and return on equity.

ICICI Securities notes that some NBFCs are highlighting seasonality, while others mention the impact due to credit crunch post the implementation of guardrail 2.0. The Reserve Bank of India (RBI) has implemented a 100-basis points rate cut since February, which is expected to drive a small moderation in the cost of borrowings in April-June. The full impact of the RBI's rate cut on net interest margins is expected to reflect in the second half of the current financial year.

Analysts expect the operating expenditure to remain elevated as players invest in digital transformation and new business verticals. Growth for housing finance NBFCs is expected to pick up, with companies like SHFL (Shriram Finance) expecting a 20 basis points reduction in cost of funds in FY26. Similarly, CIFC (Cholamandalam Investment and Finance Co) expects a 15 basis points reduction in cost of funds, with about 20% of its borrowings linked to the repo rate or T-Bills.

Bajaj Finance is expected to have a 15 basis points improvement in its cost of funds in FY26, due to the lower interest rate environment. The cost of funds for auto financiers is expected to continue moderating, leading to an improvement in margins in the quarter ended June.

In summary, the subdued earnings forecast for vehicle finance and microfinance NBFCs in Q1 FY26 is primarily due to slower loan disbursements, higher credit costs, regulatory pressures, and challenges in collections that have slowed recovery for these specific sectors amid a broader gradual improvement in the NBFC industry. Meanwhile, diversified financials and housing finance companies are expected to perform better, thanks to more stable credit costs and return on equity.

1. The ongoing challenges in the vehicle finance and microfinance sectors have prompted concerns about subdued earnings for Indian non-banking financial companies (NBFCs) in the Q1 FY26, with factors like slower loan disbursements, higher credit costs, and regulatory pressures weighing heavily.
2. The digital transformation and expansion into new business verticals are driving up operating expenditures for various NBFCs, potentially offsetting any gains from moderating cost of funds.
3. Amidst these challenges, analysts predict that housing finance NBFCs will witness a growth spurt, as companies such as SHFL and CIFC anticipate reduction in their cost of funds by 20 basis points and 15 basis points, respectively, in FY26.
4. Seeking growth opportunities within the finance market, some investors may consider alternative investments like DeFi (decentralized finance) or focusing on personal-finance management to diversify their portfolios.
5. Anticipating a lower interest rate environment in FY26, Bajaj Finance is forecasting a 15 basis points improvement in its cost of funds, while auto financiers are projected to experience continued moderation in their cost of funds, contributing to improved margins.

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