India NBFCs: Growth Amidst Margin Squeeze

India’s Non-Banking Financial Companies (NBFCs) are set to maintain consistent growth in the near to medium term, driven by strong credit demand, according to 360 ONE Capital. This positive outlook persists despite global geopolitical uncertainties and mounting pressure on lending yields.

Key Financial Performance Highlights

• Overall Assets Under Management (AUM) grew by approximately 19%.
• Net interest income for NBFCs (excluding power financiers) rose by 23.9% year-on-year in Q1 FY27.
• Operating profit increased by 24.9%, with profit after tax soaring by 36.9% year-on-year.
• Muthoot Finance notably experienced a sharper-than-expected margin compression of about 300 basis points.

Sustained Credit Demand and Asset Stability

Management teams across most NBFC segments have affirmed their growth forecasts for FY27. The sector benefits from resilient credit demand and broadly stable asset quality, with early delinquency data showing no significant stress.

Neither the West Asia crisis nor the El Nino phenomenon has had a substantial impact on borrowing activity. Profit growth notably outpaced AUM expansion, while operating income also saw a faster rise without a significant increase in early-stage repayment issues.

Varied Performance Across NBFC Segments

Different NBFC categories exhibited varied growth trajectories during the period. Vehicle financiers demonstrated robust portfolio expansion, while housing finance companies faced challenges.

• Vehicle financiers saw their AUM grow by 16.8% year-on-year, propelled by strong disbursement activity.
• Housing finance companies experienced weaker AUM growth of only 5.6%, partly due to increased balance transfers from LIC Housing Finance.
• LIC Housing Finance subsequently revised its FY27 loan growth guidance downwards.

Gold finance companies recorded a significant 47.1% year-on-year growth, though this pace has moderated. This slowdown is attributed to stabilizing gold prices, the introduction of new gold loan guidelines, and heightened market competition.

The weakest segment was power financiers, whose loan book expanded by only 2.3% year-on-year. This segment also saw a quarter-on-quarter decline of 0.3%, indicating a more challenging environment.

Persistent Pressure on Lending Margins

Despite overall growth, lending yields and net interest margins remain critical areas of concern for NBFCs. Gold lenders and affordable housing finance companies are feeling the most intense pressure.

Affordable housing lenders must closely monitor funding costs, loan pricing strategies, and customer movement. Maintaining net interest margins presents a key challenge across the sector, particularly for these specific segments.