NBFCs Set for 20% AUM Growth, But Rising Costs May Bite
JM Financial report predicts 20% AUM growth for NBFCs in Q2FY27, but warns that rising borrowing costs could squeeze profit margins.
Diversified non-banking financial companies (NBFCs) are poised for a period of significant expansion, with assets under management (AUM) expected to surge by approximately 20% year-on-year in Q2FY27. However, this growth trajectory comes with a cautionary note as escalating funding costs threaten to squeeze profit margins, according to a recent report by JM Financial.
The Shift from Demand to Cost Pressures
While the first quarter of FY27 showed a favorable environment, the macroeconomic landscape has begun to shift. The report suggests that for the second half of FY27, the primary concern for earnings is no longer just consumer demand, but rather the rising cost of borrowing.
Key indicators of this tightening liquidity include:
- Government Securities: The 10-year G-sec yield has climbed by 25–40 basis points since August 2026.
- Corporate Bonds: Yields on AAA-rated bonds for NBFCs with three- and five-year tenures have jumped by 50–60 basis points since June 2026.
JM Financial anticipates that this mounting pressure on funding costs will likely impact profitability, specifically flowing through the financial statements in FY28. Additionally, new draft regulations from the IRDAI regarding commission income could present further headwinds for earnings in that period.
Sector-Specific Growth Drivers
Despite the cost concerns, several sub-sectors are expected to maintain strong momentum driven by specific consumer needs:
1. Diversified NBFCs and MSME Lenders
Diversified financiers are expected to lead the sector's earnings growth. Strong retail demand and a growing appetite for micro, small, and medium enterprise (MSME) loans are providing a solid foundation. The report projects an aggregate AUM growth of ~20% YoY, with Return on Assets (RoA) and Return on Equity (RoE) estimated at ~3.0% and ~15.1%, respectively.
2. Gold Loans and Loans Against Property (LAP)
Lenders specializing in gold loans and LAP are looking at a robust recovery. Specifically, gold loan providers and MSME lenders could see AUM growth of roughly 27% YoY, supported by a 33% surge in loan disbursements. This is being driven by a gradual pickup in LAP and sustained demand for gold-backed credit.
3. Vehicle and Housing Finance
The automotive lending space remains resilient. Vehicle Financiers (VFs) are expected to see AUM growth of around 18% YoY, backed by healthy disbursement momentum. Meanwhile, Housing Finance Companies (HFCs) and affordable housing specialists are projected to grow their AUM by approximately 13% YoY, fueled by a 24% rise in loan disbursements.
4. Microfinance Institutions (MFIs)
Microfinance institutions are on the path to a faster recovery. This turnaround is expected to be driven by higher-value lending and an improvement in their core microfinance operations, alongside a low base effect from the previous year.
Summary of Expected Growth Trends
According to the JM Financial analysis, the hierarchy of earnings growth is expected to follow this order:
- Diversified financiers
- Vehicle financiers
- MSME and gold loan lenders
- Housing finance companies
- Microfinance institutions (recovering)