Time for NBFC stocks to shine again? Policy support, repo rate cuts to benefit these 4 banking stocks

Economic Times

08-07-2025

iStock NBFC stocks are expected to perform well in the upcoming quarter, bolstered by RBI rate cut and policy support for NBFC-MFIs Non-banking finance companies (NBFCs) have faced multiple challenges over the past few quarters amid delinquencies in unsecured loans, tight liquidity, and rigorous scrutiny by the Reserve Bank of India (RBI).
However, their performance is expected to improve after cuts in interest rates and phased reduction in the cash reserve ratio (CRR) that will lead to an increase in liquidity and boost credit growth. The relaxation of regulations for NBFCs focused on gold loans and microfinance institutions (MFIs) will also help.
Performance concerns were reflected in the share prices of NBFC companies in the first five months of 2025. The group of 104 listed companies in the financial services and consumer finance space, with a market cap of more than Rs.100 crore, delivered an equal weighted average return of -4.5% between 1 January and 31 May 2025. In comparison, the Nifty 500 equal-weighted index delivered -1.5% during the same period. Policy support The repo rate has been cut by 1 percentage point this year—25 basis points each in February and April, and 50 basis points in June. The CRR is being lowered by 100 basis points in four steps between September and November, a move that will lead to an infusion of an estimated Rs.2.5 lakh crore liquidity into the banking system. This, in turn, is expected to boost the net interest margins (NIMs) of NBFCs.The increased liquidity and lower rates will support NIMs by reducing the cost of funds (CoF). The NIM is the difference between the interest income generated from lending activities and that paid on borrowed funds.'While the policy action is positive for the entire NBFC space, the players with high fixed rate assets (vehicle loans, loans against property) stand to benefit the most,' stated a recent ICICI Securities report. It expects the CoF to improve by 20-40 basis points in 2025-26 for most NBFCs.The relaxation on new gold loans will be effective from April 2026. The loan-to-value (LTV) ceiling is being raised from 75% to 85% for loans with ticket sizes of less than Rs.2.5 lakh. This means that the gold loan focused NBFCs can lend more for every Rs.100 worth of gold. This will make the borrowings attractive and support the loan book expansion.In the second key relaxation, the central bank dropped the qualifying assets threshold from 85% to 60% for NBFC-MFIs. This is the minimum amount of eligible microfinance loans that NBFC-MFIs must hold on their books, allowing them to diversify into more profitable segments, such as affordable housing or consumer finance.'With the qualifying asset threshold lowered, MFIs now have the flexibility to diversify their loan books, moving beyond traditional group lending to slightly larger ticket sizes. This will help stabilise the earnings across credit cycles,' said Harshal Dasani, Business Head, INVasset, PMS.An Emkay report has stated that the NBFCs are set for risk-calibrated, profitable growth, aided by the reduction in cost of funding and easing of stress in some segments. Though the report expects a lacklustre performance in the June quarter, meaningful gains are expected from the second half of the current financial year and in 2026-27.
Repo rate cuts spell bonanza for NBFC stocks
Lower cost of funds will improve NIMs. The sentiment for the NBFC sector has improved since the policy measures were announced on 6 June. The group of 104 companies has generated an equal-weighted average return of 3.6% between 5 June and 1 July, compared with the Nifty 500 equal weighted index's 2.1% return.These measures could result in a re-rating of NBFC stocks over the next three to six months, led by an improved margin outlook, stronger balance sheets and higher loan growth visibility, said Manish Goel, Founder and Managing Director, Equentis Wealth Advisory Services.Here are the four NBFC stocks with broad analyst coverage and a significant buy rating.
Stock price returns
What do the analysts say? Aditya Birla Capital The firm reported a steady performance across business segments in the March 2025 quarter, with 6% year-on-year growth in net profit.
It reported a strong loan growth in both NBFC lending and housing finance— 20% and 69% year-on-year, respectively. While the former was driven by SME and corporate loans, strong disbursements aided the latter.
Health insurance, life insurance and asset management also performed well.
The management expects margins to improve in the future, helped by a fall in the cost of funds and a gradual increase in the share of unsecured loans in its loan mix. The modifications in the strategy for customer selection in the unsecured segment will support disbursements in consumer and personal loans.
A Motilal Oswal report estimated a consolidated return on equity (RoE) of 14% by 2026-27. Aptus Value Housing Finance The company reported a strong performance in the March quarter, with 26% and 25% growth in net profit and AUM, respectively, on a year-on-year basis. While volume growth supported the AUM, the assignment transaction of Rs.75 crore boosted the net profit.
The company enjoys a strong capital adequacy ratio of 70%, which has helped it to report robust return ratios. Moreover, its steady cost-to-income ratio makes it a cost-efficient affordable housing finance lender.
Strong asset quality, steady credit costs and likely revival in disbursements in 2025-26 are some of the key positives.
Moreover, focus on increasing floating rate borrowings, to benefit from the ratecycle reversal, and a high share of fixed rate loans will improve spreads and profitability in the future.
The management expects the AUM to reach Rs.25,000 crore by 2027-28, implying a 32% CAGR.
An ICICI Securities report expects that the growth momentum will sustain due to the stringent credit monitoring, strong collection mechanism, focus on geographical diversification and controlled opex. PNB Housing Finance The NBFC reported a steady performance in the March quarter, with 25.3% year-on-year growth in net profit. An uptick in high-yielding segments, provision write-backs and efficient asset liability management supported the performance.
To enhance growth, the company's management is focusing on affordable housing and emerging market segments. On the other hand, the company is slowing down disbursements in the prime segment due to the increased competition from large banks.
Affordable housing and emerging market segments currently constitute 24% of the loan book and the management plans to scale up such segments to 40% by 2026-27. The increase in scale will impart efficiency gains by reducing opex and will lead to an improvement in return on assets (RoA).
With 70% of borrowings on floating rate, the rate cut will prove favourable by lowering the borrowing costs.
A recent Nirmal Bang report remains positive on the company due to its improved growth prospects, with expansion in emerging markets and affordable segments, along with the improving return ratios due to the likely NIMs expansion and benign credit costs. Shriram Finance It reported a subdued performance in the March quarter due to a spike in credit costs and contraction in NIMs.
Tepid demand amid weak government capex and minor deterioration in asset quality weighed on its performance.
Going forward, the margins are expected to improve, helped by an improved product mix, rate cut, and expectations of a higher government capex. Moreover, the asset quality is expected to stabilise in the second half of the current financial year.
A recent Motilal Oswal report is bullish on Shriram Finance due to its market leadership, strategic diversification in high-growth, non-auto segments, potential for margin and operating efficiency improvements, attractive valuations and strong earnings visibility.