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We expect our NBFC universe to enter a phase of healthier growth momentum, underpinned by broad-based AUM expansion across the SME, consumer finance, and vehicle finance segments. Asset quality trends are largely stable, with some improvement led by better collection efficiency. Improving disbursement traction, supported by strong festive demand, GST rate moderation across key products (despite some moderation on ticket size), rural recovery, and sustained mortgage demand are likely to drive sequential acceleration in growth. We expect margin to be broadly stable/marginally improve, as CoFs continue to moderate owing to the RBI rate cut (MCLR passed-on by banks) and some benefits on variable rate loans passed on to customers. Operating metrics are expected to be resilient, positioning the sector favorably. On asset quality and credit cost, we expect asset quality to be stable while credit cost would be contained and see some moderation on account of improved collection efficiency and improving cashflow. Overall, we see the steady growth trend and slight moderation in credit cost leading to improved profitability in Q3FY26. Following a good monsoon, repo rate cuts, and GST cut-led demand impetus, we expect credit cost and profitability to improve in H2FY26, with growth remaining healthy. On risk-reward basis, we continue to like ABCAP and SHFL.

Seasonally-strong quarter supported by macro tailwinds

The NBFC sector is witnessing a gradual improvement in growth momentum, with AUM expansion supported by macro tailwinds like GST cut, moderating COFs, and a strong festive demand; asset quality trends are stable, with signs of gradual improvement, driven by better collection efficiency and tightened underwriting parameters. Margins are likely to be stable-to-marginally higher, as funding costs ease with rate cuts and MCLR pass-through, even as some benefits are passed on to borrowers, while steady asset quality and moderating credit costs should improve profitability. Overall, balance sheets remain healthy for our coverage companies, backed by strong capital buffers, prudent provisioning, and improving asset quality. We expect growth visibility to improve, with the aforementioned tailwinds continuing to support earnings resilience.

Stable asset quality and minor improvements in credit cost likely

For NBFCs, H2 has typically been seasonally strong, and Q3 is expected to be a healthy quarter for most players in our coverage, in terms of growth, disbursements, and asset quality; margins are likely to be broadly stable or improve marginally. Concerns around stress in MSME, micro-LAP, and unsecured segments have been gradually easing, as business activity improves, aided by a good monsoon, strong festive demand, policy support from the government, and improved underwriting standards. Credit costs are expected to largely improve or stay flat on account of reducing stress in some of the product segments, improving rural cashflow, and tightened underwriting.

Improving CoF and credit cost to support profitability

We expect most NBFCs to report stable-to-improving margins, as recent rate cuts— especially on bank borrowings—begin to flow through. However, operating expenses are likely to remain elevated for most players due to continued investments in technology and capability expansion. Lower credit cost, with improved margin, is likely to more than offset the sticky opex, to drive improving profitability for most stocks under coverage.

Power financiers maintain stability amid slower growth

We expect REC and PFC to remain stable over coming quarters, supported by recoveries from stressed assets and resilient asset quality. Loan disbursements in the power sector are expected to remain subdued, on accelerated repayments by state utilities which likely impacted AUM growth; we expect a marginal impact on profitability on account of translation losses led by a depreciating rupee. The recent share-price corrections appear to have already priced in this moderation, making valuations attractive. At FY27E P/B of ~0.9x for REC and of ~0.8x for PFC, and with RoEs expected at 16–18%, both stocks stand out as stable investment opportunities, backed by solid fundamentals and ongoing sector reforms.

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