India’s non-banking financial companies (NBFCs) appear to be entering a more broad-based phase of cyclical recovery, with first-quarter FY27 results pointing to improvement across growth, asset quality, margins and operating leverage. The recovery is also beginning to feed into earnings expectations, with upgrades coming earlier than typically seen at this stage of the financial year.

What stands out this time is that the earnings improvement is not being driven solely by lower provisions. Loan growth has remained healthy across both secured and unsecured segments, while credit costs have normalised faster than anticipated. Funding costs are also expected to moderate from first-quarter levels, helping offset some pressure from gradually softer lending yields. At the same time, operating leverage is beginning to emerge as an additional support to profitability.

Asset quality has been one of the strongest positives. After nearly two years of stress across microfinance, unsecured personal and business loans, and select secured retail segments, collection efficiencies have improved and fresh slippages have moderated. Tighter underwriting, stronger collection infrastructure, lower borrower leverage and a greater focus on secured lending have contributed to the improvement. The faster-than-expected decline in credit costs suggests that the sector may have moved beyond the peak of the asset-quality cycle.

Growth is also recovering without a visible deterioration in risk discipline. Vehicle financing has benefited from strong demand following GST cuts, steady commercial vehicle replacement and improving used-vehicle financing. Housing finance continues to see healthy disbursements in affordable and mid-income segments, while gold financing remains supported by demand for secured credit. Growth is also recovering across MSME, personal and digital lending. Importantly, lenders are increasingly prioritising profitable, return-accretive growth over simply maximising market share.

The next leg of the earnings cycle could come from operating leverage. Investments in technology, digital sourcing, centralised operations and analytics made over recent years are beginning to support efficiency, with the potential to improve return ratios over the medium term.

Risks remain, particularly from a prolonged West Asia crisis, inflation, monsoon uncertainty, interest-rate movements and evolving RBI regulations. A sustained rise in energy prices could delay monetary easing and increase funding costs, while weaker monsoon conditions could affect rural incomes and credit demand.
Overall, the NBFC sector enters the next phase with a healthier combination of growth, asset quality and profitability. As earnings estimates move higher and balance-sheet risks recede, the focus is increasingly shifting from recovery to the potential for a broader valuation re-rating.

Bajaj Finance TP-1300

Bajaj Finance has moved beyond the earnings normalisation phase and is entering a period of structurally stronger earnings growth, supported by broad-based loan growth, resilient margins, improving asset quality, and declining credit costs. The company’s comprehensive roadmap, focused on customer-centric growth, AI-led execution, portfolio diversification, and disciplined risk management, is expected to further strengthen its competitive positioning and sustain profitability.

L&T Finance TP- 380

L&T Finance is well-positioned for steady improvement in growth and profitability, supported by its transition toward a granular, retail-focused, and technology-led franchise. Strong AUM growth visibility, scaling core retail segments, emerging businesses such as gold loans and micro-LAP, improving secured product mix, cross-sell opportunities, and technology-led operating leverage are expected to drive a ~30% PAT CAGR over FY26-28E, with RoA/RoE reaching 2.6%/15% by FY28E.

(The author is Siddhartha Khemka – Head of Research, Wealth Management, Motilal Oswal Financial Services Ltd)

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