NBFCs Margin Squeeze Not to be Avoided with Strong Loan Growth

Indian non-banking financial companies (NBFCs) have kicked off the Q2FY27 earnings season on a positive note with strong loan growth, though higher borrowing costs could impact profitability. Retail, vehicle, housing and microfinance loan demand is still robust, but higher bond yields and funding costs could constrain net interest margin (NIM) improvements.

NBFCs record strong loan growth in Q2FY27 NBFCs' loan portfolios continue to grow in July-September 2026 quarter, aided by consumer demand, vehicle financing and improving rural credit activity.

Diversified NBFCs are likely to register ~26% YoY growth in AUMs while vehicle financiers may grow by ~18%.

Housing finance companies are expected to post an AUM growth of around 13% on the back of demand for residential properties and affordable housing loans.

Gold loan, MSME and loan against property businesses are expected to grow at around 27% indicating sustained demand for secured borrowing.

But the pace of growth differs in the lending segments, where profitability is increasingly driven by funding costs and efficiency in debt collection.

Bajaj Finance’s AUM rises 26.5%

Bajaj Finance’s Q2FY27 provisional business growth robust.

As on September 30, 2026, its AUM stood at ₹5,84,750 crore, up 26.5% YoY from ₹4,62,261 crore a year Earlier.

The company added about ₹37,800 crore to its AUM during the quarter.

Key Metric Q2 FY27 Result

New loan bookings were up something like 11% year-on-year. Customer base was up 16.5%.

Company’s housing finance subsidiary registered around 25% YoY AUM growth indicating sustained demand for housing loans

More expensive borrowing hits margins

The biggest challenge facing NBFCs is the rising cost of funds.

Yields on India’s 10-year government security have risen by 25-40 basis points (bps) since August, while three- and five-year AAA-rated NBFC bonds have risen by 50-60 bps since June.

Higher borrowing costs could close the gap between the return on a loan and the cost of the financing.

This puts additional pressure on lenders offering fixed rate loans, as they cannot immediately raise interest rates on their existing portfolio.

For some NBFCs, NIM may come down by 5-15 bps based on their funding mix, lending products and ability to reprice loans.

Companies may have more flexibility from more diversified funding sources, stronger deposit franchises and floating-rate loan portfolios.

Microfinance Asset Quality & Recovery Spotlight

Microfinance lending is beginning to recover from a long period of repayment stress.

CreditAccess Grameen posted AUM growth of ~20% YoY to ₹30,946 crore, collection trends improve.

But borrowers in the village still have to face vagaries of monsoon, volatile farm income and higher household expenses.

Lower credit costs could partially offset the higher funding costs for NBFCs, but loan delinquencies and provisioning requirements remain key.

Outlook for NBFC Stocks:

The Q2FY27 earnings season will provide a better sense of the impact of the higher cost of funds on profitability.

Investors will see NIMs, return on assets (RoA), return on equity (RoE) loan growth and non-performing assets (NPAs).

Strong credit demand may help lift revenue growth, but profitability will hinge on tight cost control and solid asset quality.

“The next challenge for the industry will be how to convert growing loan books into sustainable earnings without compromising lending standards.”