In the fourth quarter of FY26, India’s non-banking financial firms (NBFCs) demonstrated a generally robust performance, bolstered by robust expansion in the areas of car lending, affordable housing financing, and gold financing. However, a sector study by 360 ONE Capital Research suggests that the sector may face significant issues in the upcoming quarters due to growing funding costs and possible inflationary pressures.
The report observed that while high gold prices continued to sustain strong growth in the gold loan segment, affordable housing finance firms continued to report solid growth and mostly maintained their medium-term assets under management (AUM) targets.
Gold Loan Companies Lead Growth
The two market leaders’ performance differed greatly among gold financiers.
Manappuram Finance exceeded expectations with AUM growth of 48.3% year over year and 22.4% quarter over quarter. But while the business used aggressive pricing to increase its market share, the growth came at the expense of profits, which drastically shrank.
In the meantime, Muthoot Finance posted impressive earnings, with net profit increasing by more than 100% from the previous year. However, the report pointed out that rather than core operating strength, a large portion of the earnings outperformance was driven by one-time events such as auction income and gains tied to ARC. Throughout the quarter, there was continued pressure on gold tonnage and customer additions.
The brokerage anticipates that gold loan businesses will continue to increase their AUM at a solid rate over the coming quarters, but as gold prices stabilize and favorable base effects diminish, growth may eventually normalize by the end of FY27.
Financing for Affordable Housing Is Sturdy
Despite some margin contraction, affordable housing finance providers continued to report robust growth.
Home First Finance maintained guidance across key operating criteria while reporting AUM growth of 24.9% year over year. Although Gross Stage 3 and Net Stage 3 assets decreased throughout the quarter, asset quality also improved.
According to the research, the majority of financiers for affordable housing reaffirmed their medium-term growth goals, indicating confidence in the fundamentals of demand and plans for expansion.
Bajaj Finance Provides Consistent Results
With AUM growth of 22.4% year over year and 5% sequentially, Bajaj Finance reported a generally stable quarter. Gross Stage 3 assets decreased to 1.01 percent, and net Stage 3 assets decreased to 0.41 percent, indicating an improvement in asset quality. The business stuck to its 22–24% growth target for FY27.
Bajaj Finance’s results, according to the report, were mostly in line with expectations and were bolstered by lower-than-expected lending charges.
Growth Slowdown for Power Financiers
During the quarter, lenders in the power industry saw slower-than-anticipated loan growth.
Because of margin compression and slower loan growth, Power Finance Corporation reported decreased net interest income. Nonetheless, profitability was bolstered by increased write-backs and better asset quality. Assets in Gross Stage 3 and Net Stage 3 fell to 1% and 0.2%, respectively.
Due to greater provisions associated with RBI directives on off-balance-sheet risks, REC also reported reduced profitability and muted loan growth. However, after stressed assets were resolved, asset quality improved.
According to the research, power financiers’ combined loan growth slowed significantly to 4.8% year over year due to higher repayments and fewer disbursements.
Asset Quality Rises Throughout the Industry
The widespread improvement in asset quality was one of the report’s main advantages.
While Gross Stage 2 and Gross Stage 3 assets decreased over much of the coverage universe, average credit costs stayed below expectations in the majority of NBFC segments. The majority of management teams indicated steady trends in asset quality with little discernible stress from the ongoing crisis in West Asia.
Analysts warned that after the first quarter of FY27, any secondary economic consequences from rising crude oil prices and inflationary pressures would become apparent.
Margin Sustainability Becomes a Major Issue
Although margins in a number of NBFC divisions exceeded projections throughout the quarter, 360 ONE Capital cautioned that maintaining these increases would be difficult.
According to the paper, rising corporate bond yields may put pressure on businesses that rely more on market borrowings, especially non-convertible debentures (NCDs). Companies like Sundaram Finance, Bajaj Finance, and LIC Housing Finance may be increasingly vulnerable to rising finance costs.
“The sustainability of NIMs remains a key monitorable,” the research stated, adding that in highly competitive areas, funding costs can reprice more quickly than lending rates, which might result in bank margin compression in the upcoming quarters.
Despite these worries, the brokerage continues to be positive about the industry, especially in the financing of affordable housing, and anticipates that growth momentum will continue to be strong until FY27.
