The growth in non-banking financial companies (NBFCs) are improving as macroeconomic challenges subside, and the Reserve Bank of India (RBI) adopts a more supportive approach, according to Jefferies.
Jefferies Group LLC, a New York-based multinational investment bank and financial services firm, noted that stabilizing asset quality, improved liquidity and favorable interest rate trends position the sector for steady growth. The overall macroeconomic outlook is strengthening, supported by increased government spending and RBI’s efforts to ease liquidity constraints.
The RBI’s recent decision to reduce risk weights on bank lending to NBFCs reflects a constructive stance, enhancing funding accessibility, particularly for smaller NBFCs.
Additionally, a recent 25-basis-point interest rate cut and the potential for further reductions will support net interest margins (NIMs) across the sector.
Despite improvements in some regions, the transition to MFIN 2.0 regulations in April 2025 may pressure the microfinance (MFI) segment. However, the impact of unsecured MFI loans on secured loan products remains limited. NBFC exposure to MFI overlaps is highest in gold loans (9%), small-ticket loans like micro LAP/PL (6-7%), affordable housing (4-5%), and two-wheeler loans (2%), while commercial vehicle (CV) loans remain largely unaffected.
The vehicle financing sector is seeing mixed trends. While demand for light commercial vehicles (LCVs) is improving, medium and heavy commercial vehicles (MHCVs) continue to struggle with weak demand and rising competition.
Following RBI’s 25bps rate cut, public sector banks have reduced home loan rates to 8.1-8.2%, while private banks have yet to adjust their rates.
Larger housing finance companies (HFCs) with fixed liabilities may face pressure on NIMs, making affordable housing finance companies (AHFCs) a preferred choice due to their stronger pricing power. Among AHFCs, Home First Finance remains a top recommendation.
Although NBFC stocks have declined by 3-41% from their six-month peaks, leading retail and auto-focused NBFCs have outperformed the broader market.
