The fundamentals of Non-Banking Financial Companies (NBFCs) are showing signs of improvement as macroeconomic challenges ease and the Reserve Bank of India (RBI) adopts a more supportive stance, according to Jefferies.

With stabilising asset quality, improving liquidity, and emerging rate tailwinds, the sector is poised for steady growth. The overall macroeconomic environment is improving with increased government spending and RBI’s measures to ease liquidity constraints. The central bank’s recent risk weight reduction on bank lending to NBFCs signals a constructive approach, which should enhance funding access, particularly for smaller NBFCs.

Additionally, a recent 25-basis-point interest rate cut, along with potential future cuts, is expected to support net interest margins (NIMs) across the sector.The asset quality (AQ) of NBFCs is showing stabilisation across key segments. Collections have improved in recent months, and while gross non-performing assets (GNPA) may rise slightly in Q1 FY26, the increase is expected to be lower than last year. However, the microfinance institution (MFI) segment remains under stress, particularly in Karnataka, where a microfinance ordinance impacted collection efficiency.

Despite some improvements in other states, the transition to MFIN 2.0 regulations in April 2025 could add further pressure to the MFI segment. However, spillover effects from unsecured MFI loans to secured loan products remain limited. NBFC exposure to MFI overlaps is highest in gold loans (9 per cent), small-ticket loans like micro LAP/PL (6-7 per cent), affordable housing (4-5 per cent), and two-wheeler loans (2 per cent), while commercial vehicle (CV) loans remain largely unaffected. The vehicle financing sector is experiencing mixed trends. Demand for light commercial vehicles (LCVs) is improving, while medium and heavy commercial vehicles (MHCVs) continue to face muted demand and rising competition.

The affordable housing finance sector (AHFCs) is witnessing steady disbursements, though some pricing pressure is emerging due to aggressive competition from larger players.Post-RBI’s 25bps rate cut, PSU banks have lowered home loan rates to 8.1-8.2 per cent, but private banks have yet to follow suit. Larger housing finance companies (HFCs) with fixed liabilities may experience NIM pressure, making AHFCs a preferred choice due to their better pricing power. Among AHFCs, Home First Finance remains a top pick. While NBFC stocks have declined 3-41 per cent from their six-month peaks, top large retail and auto-focused NBFCs have outperformed the broader market.