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Demand trends healthy and asset quality stable; NIM pressure due to higher CoF

* Demand trends remained strong: We expect ~12% YoY growth in AUM for our coverage HFCs, including both affordable and large HFCs, in 2QFY27. Vehicle financers are projected to report ~18% YoY AUM growth. Gold lenders (including non-gold products) are likely to record ~42% YoY growth. NBFC-MFIs are estimated to post AUM growth of 20% YoY, while diversified lenders are expected to deliver ~27% YoY growth in AUM. For our NBFC coverage universe, we estimate loan growth of ~17% YoY/4.3% QoQ as of Sep’26.

* Healthy growth and broadly stable asset quality: NBFCs are expected to deliver a steady operating performance in 2QFY27, supported by sustained loan growth and stable asset quality. Growth momentum was broad-based across most lending segments (excluding power finance), with housing finance, vehicle finance, gold loans and unsecured retail maintaining healthy demand. Gold loan growth remained robust, albeit moderating from the exceptionally strong momentum seen last year. MFIs are expected to report steady disbursement momentum, although sequential growth could be slightly lower than anticipated, primarily because of floods in certain parts of the country.

* Rising incremental CoF continues to weigh on NIMs: Incremental CoF for NBFCs continued to inch up in 2QFY27, particularly for lenders with greater reliance on market borrowings, as bond yields remained elevated amid geopolitical uncertainties. Going forward, evolving inflation dynamics, driven by food inflation, weak monsoons and geopolitical developments, could prompt the RBI to hike the repo rate in the upcoming MPCs, potentially exerting further pressure on the cost of borrowings for NBFCs. Consequently, we expect NIM to remain under pressure in the near term. However, HFCs are relatively better placed given their floating-rate loan books, which enable faster repricing of assets. Diversified lenders could partly mitigate margin pressure by increasing the share of higher-yielding unsecured loans in their portfolio, thereby supporting overall yields.

* Asset quality broadly stable; 2HFY27 trajectory remains watchful: Asset quality remained broadly stable across most lending segments during the quarter. Collections were marginally lower in the tractor portfolio, primarily due to weak monsoons, while housing, vehicle (excluding tractors), gold, MFI and diversified finance portfolios continued to report stable asset quality. Importantly, high crude oil prices and the West Asia conflict did not result in any deterioration in portfolio quality. Going forward, asset quality is a key monitorable in 2H, as weak monsoons and El Niño conditions, which have led to drought-like situations across few states, could weigh on rural cash flows and impact repayment ability of borrowers.

* Earnings to remain healthy: For our NBFC coverage universe, we estimate ~20%/18% YoY growth in NII/PPoP and ~24% YoY growth in PAT in 2QFY27. We prefer diversified lenders and mortgage players, and our top picks in the sector are BAF, SHFL, PNBHF and Five Star.

HFCs: Heathy disbursement and AUM growth; NIMs trends mixed

* Disbursement momentum was healthy across HFCs during the quarter. While competition remains elevated, pricing is rational, with BT-outflows also stabilizing across HFCs. Margins for both large HFCs and affordable HFCs are likely to remain under modest pressure due to a marginal increase in incremental CoF.

* Asset quality is expected to remain broadly stable across HFCs during the quarter, supporting benign credit costs.

* For LICHF, we expect credit costs (net of recoveries) at -5bp (vs. -14bp in 1QFY27). NIM is expected to decline ~7bp QoQ. We expect LICHF to report 5% YoY growth in loans and 12% YoY growth in disbursements. We expect BHFL to report AUM growth of 25% YoY and NTI to decline ~10bp QoQ.

* We forecast HomeFirst to report ~33% YoY growth in disbursements, leading to AUM growth of ~27% YoY. Asset quality is expected to remain broadly stable for both HomeFirst and Aavas. Aavas is expected to report disbursement and AUM growth of 21% and 16% YoY, respectively. Disbursements for CANF were impacted during the quarter due to teething issues following the implementation of its new technology platform across ~175-180 branches.

* We estimate PNBHF to deliver ~18.5% YoY growth in total loan book as of Sep’26. For PNBHF, we expect NIM to expand ~3bp QoQ. Asset quality improvement and recoveries from the written-off pool in both Retail/Corporate could potentially again result in provision write-backs (like in the prior quarters).

* For Five Star, loan growth and disbursements are expected to rebound. We expect disbursements to grow 69% YoY and 35% QoQ, translating into ~14% YoY growth in AUM. We expect credit costs to remain broadly stable QoQ at ~1.8%.

Vehicle finance: Stable disbursement momentum; asset quality stable

* MMFS reported disbursements of ~INR165b in 2QFY27 (up ~22% YoY), leading to ~15% YoY growth in business assets. We expect credit costs for MMFS to be at ~1.8% in 2QFY27 (vs. ~1.7% in 1QFY27).

* For CIFC/SHFL, we expect disbursement growth of 30%/22% YoY, which should translate into ~23%/16% YoY growth in AUM in 2QFY27.

* Disbursement momentum in the vehicle finance segment remained healthy, sustaining its strong trajectory in 2QFY27. Demand was robust across key segments, including PVs, CVs and 2Ws. However, the tractor finance portfolio witnessed a marginal slowdown, primarily due to weak monsoons and droughtlike conditions in few states.

* Asset quality was broadly stable during the quarter, with no material stress observed across segments despite the West Asia conflict and weak monsoons. However, the tractor portfolio of VFs is expected to exhibit minor asset quality deterioration, reflecting some impact from weaker monsoons.

* Margin trends were divergent across vehicle financiers, with SHFL expected to report margin expansion, while CIFC and MMFS are likely to report margin contraction due to higher incremental CoF during the quarter.

MFIs: Steady business momentum; fresh PAR accretion stable

* Business momentum across MFI lenders remained steady; however, sequential disbursement growth was slightly weaker (with the exception of Spandana) than earlier anticipated. Despite slightly softer disbursement momentum, AUM growth remained steady, albeit on a low base. We expect QoQ AUM growth of ~2.5%/4%/11.5% for CREDAG/Fusion/Spandana in 2QFY27.

* Asset quality in the MFI segment was stable during the quarter, supported by stable PAR levels and controlled fresh flow-forwards. Fresh PAR accretion was in the range of 18-20bp for most lenders, indicating healthy collection efficiency. However, weaker monsoons this year have resulted in drought-like conditions across few states, making asset quality trends a key monitorable in 2HFY27, particularly given the potential impact on rural cash flows.

* We estimate annualized credit costs of ~3.1%/2.4%/0.5% for CREDAG/Fusion/ Spandana in this quarter. Margins are expected to improve for MFIs, supported by lower interest income reversals and the impact of price hikes implemented earlier.

Power Financiers: Muted loan growth continues; credit costs to stay benign

* Disbursement and AUM growth among power financiers remained muted during the quarter. There were no new stressed asset resolutions in the quarter. Resolution of Hiranmaye Energy is expected in 2HFY27.

* REC’s disbursements are expected to decline 1% YoY and grow 64% QoQ, leading to muted AUM growth of 5% YoY and ~4% QoQ. For PFC, we expect disbursements to decline 15% YoY, leading to loan book growth of ~4% YoY and ~2% QoQ. We expect forex losses to moderate during the quarter, providing support to earnings.

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