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Strong seasonality missing in the quarter

Seasonality notwithstanding, collection and demand trend remained rather muted

* Demand momentum remained weak in 4QFY25: We expect ~9% YoY growth in AUM for our coverage HFCs, including both affordable and large HFCs. Vehicle financers are projected to report ~20% YoY AUM growth. Gold lenders (including non-gold products) are likely to record ~29% YoY growth. NBFC-MFIs are estimated to post a decline of ~15% YoY in AUM, while diversified lenders are expected to deliver ~21% YoY growth in AUM. For our NBFC coverage universe, we estimate loan growth of ~15% YoY/~4% QoQ as of Mar’25. Notwithstanding seasonality, demand trends and loan growth remained flat during the quarter due to calibrated growth in unsecured retail, muted disbursements in microfinance and low mortgage volumes.

* Lag in transmission of repo rate cut; borrowing costs largely stable QoQ: CoB for most NBFCs has either been stable or seen a minor decline because of the repricing of EBLR-linked borrowing. However, the transmission through bank MCLR cuts is yet to happen and most NBFCs are of the view that it will happen with a lag of 3-6 months. 4Q NIM for NBFCs would exhibit stability or a minor compression, primarily because of some pressure on yields. We expect NIM to remain stable or see a minor improvement for fixed-rate lenders like vehicle financiers, which will also benefit from any subsequent repo rate cuts over the next 3-6 months. We expect a sequential expansion in NIM for CIFC (from higher yields) and MFIs (from lower interest income reversals).

* 4Q collection trends weaker YoY; MFI CE improved but credit costs still high: Asset quality remained largely stable or saw a minor improvement, driven by significant collection efforts during the quarter. Asset quality, which usually improves significantly in 4Q, is not clearly there in this quarter. Collection efficiencies for MFIs have improved MoM, and even Karnataka collections saw a sharp recovery in Mar’25 (vs. Feb’25). While credit costs for all MFIs under our coverage will decline sequentially, they still remain high at ~9%-34% in 4QFY25. Asset quality for HFCs (including affordable HFCs) is largely stable with an improvement bias. Power financiers are also expected to report improvement in asset quality, driven by the complete resolution of a stressed asset. Credit costs for vehicle financiers will be significantly higher in this quarter than in 4Q of the previous fiscal years.

* Earnings flat YoY for our coverage universe owing to sticky credit costs and lower NII growth: We estimate ~13%/15% YoY growth in NII/PPoP in 4QFY25 for our NBFC coverage universe, though PAT is expected to be flat YoY. Excluding NBFC-MFIs, we estimate ~5% YoY growth in PAT for our coverage universe. We remain underweight in microfinance and would closely monitor any impact on collections from the implementation of MFIN guardrails 2.0 from Apr’25. Our preference is for vehicle financiers (primarily to play NIM expansion from repo rate cuts), select affordable HFCs and diversified lenders (which have navigated the unsecured credit cycle and are now looking to grow their unsecured loan book again). Our top picks in the sectors are: SHFL, HomeFirst and PNBHF.

Demand remains sluggish in mid-ticket mortgages

* Disbursement momentum remained rather sluggish particularly in mid-ticket home loans, while the affordable segment still continues to see reasonably healthy demand. Delays in property registrations due to an issue in e-Khata in Karnataka have improved but not been completely normalized.

* NIMs are expected to remain largely stable for large HFCs, while they are expected to moderate sequentially for affordable HFCs due to an ongoing rise in CoF. Asset quality has not shown any signs of weakness and there is an improvement bias. Credit costs are expected to remain benign for HFCs.

* For LICHF, we expect credit costs at ~25bp (vs. -5bp in 3Q). Margins are likely to remain largely stable QoQ. We expect LICHF to report ~6% YoY growth in loans.

* We forecast HomeFirst to report ~14% YoY growth in disbursements, leading to healthy AUM growth of ~31% YoY. We expect NIM to contract ~10bp QoQ for Aavas and Homefirst due to the ongoing rise in portfolio CoB. Asset quality is also expected to remain stable for HomeFirst, while we estimate a minor improvement for Aavas.

* We estimate PNBHF to deliver ~15% YoY growth in total loan book and ~18% YoY growth in retail loans as of Mar’25. For PNBHF, we expect NIM to contract 5bp QoQ. Asset quality improvement and recoveries from the written-off pool in both Retail/Corporate may result in provision write-backs (like in prior quarters).

* For Five Star, we expect disbursements to grow ~8% YoY, translating into ~23% YoY growth in AUM. NIMs are likely to contract ~55bp sequentially due to higher leverage and a ~200bp cut in lending rates by the company since Nov’24. We expect a minor deterioration in GS3, resulting in credit costs rising to ~80bp (compared to ~70bp in 3QFY25).

Vehicle Finance – Collection trends not suggesting strong seasonality of 4Q

* MMFS reported disbursements of ~INR155b in 4QFY25 (up ~1% YoY), leading to ~16% YoY growth in business assets. We expect credit costs for MMFS to be at ~1.7% in 4QFY25 (vs. 5bp in 3QFY25 aided by provision release). MMFS also reported improvement of ~100bp QoQ in Stage 2+ Stage 3.

* For CIFC and SHTF, we expect sequential growth in disbursements, which should translate into ~26%/18% YoY growth in AUM for CIFC/SHTF as of Mar’25.

* We estimate NIM expansion for vehicle financiers in FY26, driven by a decline in CoB and a fixed-rate vehicle finance book. Asset quality is expected to remain largely stable QoQ (except for some technical write-offs, if any) and has not seen any meaningful improvement, which is generally seen in the seasonally strong 4Q of the fiscal year. As a result, we expect credit costs in Vehicle Finance will be significantly higher than they were in 4Qs of the previous fiscal years.

Gold Finance – Strong growth in gold loans with some NIM compression

* We expect gold loan financiers to deliver healthy gold loan growth and decent tonnage growth in 4QFY25. For MGFL, we expect the standalone entity to deliver ~4% QoQ gold loan growth, but the drag from its MFI and CV businesses would keep consol. loan growth muted during the quarter. We expect ~10% QoQ gold loan growth for MUTH.

* We expect margins for gold financiers to contract by ~15bp during the quarter. Asirvad MFI, subsidiary of MGFL, could exhibit further asset quality deterioration and high credit costs (higher than 3Q).

Microfinance – Credit costs decline sequentially but will remain elevated; collection efficiency improves in Feb-Mar’25

* Disbursements were muted (and lower QoQ) for Fusion and Spandana, while we expect CREDAG disbursements to have accelerated during the quarter. We expect AUM to grow ~4% QoQ and remain flat YoY for CREDAG and decline ~13%/24% QoQ for Fusion/Spandana in 4QFY25.

* Karnataka MFI ordinance had impacted collection efficiency in Feb’25, which recovered in Mar’25 and will likely take another two months to get normalized.

* For this quarter and the next two quarters, a significant proportion of the credit costs will be contributed by write-offs of loans that had slipped over the last 6-9 months. Credit cost is expected to decline sequentially for all three NBFC-MFIs in our coverage universe. However, it will remain elevated in 4Q and 1HFY26. We estimate annualized credit costs of ~9%/~14%/34% for CREDAG/Fusion /Spandana in this quarter.

* While MFIs reported early green shoots and improved collection efficiency in Jan-Mar’25, we expect normalization in the MFI sector only in 2HFY26. Additionally, the impact (if any) on collections from the implementation of MFIN Guardrails 2.0 from Apr’25 will be a critical factor to monitor.

Diversified Financiers: Readying for stronger growth in unsecured personal and business loans; credit costs expected to moderate slightly

* LTFH has reported ~19% YoY/3% QoQ growth in retail loans. Since the company is not growing its wholesale segments (such as real estate and infrastructure), we expect consolidated loan book to grow by ~3% QoQ in 4QFY25. We expect credit costs to decline ~20bp to 2.6% (vs. 2.8% in 3QFY25).

* BAF has reported ~26% YoY/5% QoQ growth in AUM. We estimate a ~5bp QoQ contraction in NIM for BAF with credit costs at ~205bp (vs. 212bp QoQ).

* Poonawalla posted AUM growth of 42% YoY/15% QoQ, with total AUM of INR355b. We expect credit costs to decline 220bp QoQ to 2.5% (vs. 4.7% in 3Q).

* For IIFL Finance, we expect the strong growth in gold loan AUM to sustain and estimate gold loan book to increase to ~INR215b as of Mar’25 (vs. ~INR150b as of Dec’24). While we expect a sequential decline in its MFI AUM, it would still exhibit ~11% QoQ growth in its consolidated AUM. We estimate PAT of INR2.2b in 4Q (vs. INR410m in 3Q).

Power Financiers: Loan growth weaker than earlier expectations; higher standard provisions on certain discoms

* Disbursements for power financiers could be subdued during the quarter (due to slowdown in economic activity), which we expect to result in lower-thanexpected loan growth for both REC and PFC. Asset quality is expected to further improve, aided by the complete resolution of KSK Mahanadi.

* During the quarter, NCLT approved the resolution of KSK Mahanadi, which will result in provision write-backs for PFC. REC will also see some provision writebacks in 4Q from the resolution of this stressed exposure, but it had already taken part of this benefit in 3Q. We also expect higher standard asset provisions on certain discoms, which saw rating downgrades earlier in 4Q.

* For PFC, we expect disbursement growth of ~14% YoY, leading to loan book growth of ~11% YoY. For REC, we expect disbursement growth of ~16% YoY, which could potentially result in loan book growth of ~13% YoY/2% QoQ.

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