NBFCs to see strong 1HFY27 growth despite margin pressure
Emkay Research predicts strong credit growth for NBFCs in 1HFY27, even as higher borrowing costs squeeze margins.
India’s non-banking financial companies (NBFCs) are poised for a robust performance in the first half of the 2027 fiscal year (1HFY27). According to a recent report by Emkay Research, the sector is expected to benefit from sustained credit demand and resilient asset quality, even as rising borrowing costs create temporary pressure on profit margins.
Credit Demand Drives Sector Momentum
The report highlights that healthy credit demand remains the primary engine of growth for the sector. While some festive-season disbursements are anticipated to shift toward the third quarter, the underlying momentum remains high. Key areas of growth include:
- Retail Lending: Strong disbursements are being seen across urban consumption, Small and Medium Enterprises (SME), and gold loans.
- Mortgages: Housing loans continue to record impressive double-digit growth.
- Auto and Trade Credit: Robust demand in these segments has helped offset the slower pace of disbursements in rural tractor and farm financing.
The Margin Squeeze Challenge
Despite the optimistic growth outlook, the report warns of a "compression" in margins across both NBFCs and Housing Finance Companies (HFCs). This squeeze is largely attributed to an elevated Cost of Funds (CoF) paired with asset yields that are remaining stable or moderating.
Emkay Research anticipates that most NBFCs may see their spreads contract by approximately 5 to 15 basis points. Looking further ahead, several factors could continue to weigh on margins and fee income, including:
- Potential RBI rate hikes in the second half of the fiscal year.
- Revised insurance commission norms.
- Geopolitical tensions in West Asia.
- Elevated funding costs tracking higher benchmark yields.
Resilient Asset Quality and Operational Strength
On a positive note, the sector's asset quality appears to be holding steady. Most NBFCs and HFCs are expected to report stable or improving metrics in the second quarter of FY27. This resilience is being driven by several key factors:
"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," the report stated.
To support long-term growth, companies are actively investing in manpower and technology to strengthen their core operating capabilities. This strategic focus is expected to bolster steady growth in operating profits over time.
Outlook for Specific Segments
The report provides a nuanced view of different NBFC sub-sectors:
- Housing Financiers: Expected to maintain strong mortgage disbursements and stable asset quality, though they may face liability-side pressures affecting net interest margins.
- Diversified and Vehicle-focused NBFCs: Likely to report strong growth in Assets Under Management (AUM), with improving credit metrics supporting overall profitability.
While regional drought conditions emerged late in the quarter, the report suggests they are unlikely to have significantly impacted credit performance in the second quarter. Overall, the sector enters the second half of FY27 on a strong footing, characterized by healthy balance-sheet expansion and robust disbursement momentum.