Whalesbook
Strong Q4 Growth Continues
Non-banking financial companies (NBFCs) expect to finish the fiscal year strongly, with asset growth projected between 15%-18% for the fourth quarter ending March 2026. This expansion, driven by robust consumer demand, is visible in recent company reports. Bajaj Finance saw its assets under management (AUM) climb 22% year-on-year to ₹5.10 lakh crore, while L&T Finance reported a 26% increase in its retail loan book to ₹1.19 lakh crore. Despite these positive figures, underlying pressures on margins and asset quality are emerging, influenced by rising funding costs and global geopolitical shifts.
Margins Face Pressure as Funding Costs Rise
The period of falling funding costs for NBFCs is likely ending. Analysts note that rising government security (G-sec) yields, which stood around 6.93% on April 10, 2026, suggest that Net Interest Margins (NIMs) are likely at or near their peak. Projections show varied outcomes across the sector. PNB Housing Finance, Bajaj Housing Finance, and Bajaj Finance are expected to see NIMs drop by 5-10 basis points from the previous quarter. Larger drops of 20-30 basis points are anticipated for Mahindra & Mahindra Financial Services and L&T Finance. In contrast, some companies like HDB, Five Star, and Cholamandalam Finance may see stable to slightly higher NIMs. This difference reflects diverse funding strategies and business models.
Global Risks Cast Shadow on Asset Quality
While the immediate impact of recent conflicts in West Asia on NBFCs' Q4 performance was minimal, broader consequences are becoming a growing concern for the coming fiscal year. Analysts warn that increasing global inflation, supply chain disruptions, and potential job losses tied to geopolitical tensions could strain borrower cash flows. This risk is particularly relevant for consumption-focused areas like unsecured loans and retail. Companies such as SBI Card, which reported an improvement in gross NPAs to 2.86% by December 2025, could face renewed pressure. Fitch Ratings predicts continued global uncertainty could lower sector margins by 20-30 basis points by FY27, driven by tighter liquidity and less central bank support.
Market Valuations Show Divergent Views
Current market valuations for key NBFC players show a mixed outlook, likely reflecting how investors perceive these evolving risks. Bajaj Finance, a major diversified lender, trades at a Price-to-Earnings (P/E) ratio of about 31.9x. SBI Card has a P/E of around 28.9x, and Cholamandalam Investment and Finance Company is valued at roughly 24.3x. L&T Finance Holdings trades at approximately 24.8x, M&M Financial Services at about 17.0x, and PNB Housing Finance at a lower P/E of around 9.76x. This valuation spread indicates varying investor confidence and expectations for different parts of the NBFC sector.
Underlying Challenges and Risks
While results point to strong growth, underlying challenges remain. The expected peak in NIMs signals a shift from a favorable interest rate environment to one with rising borrowing costs, which will directly affect profitability. Furthermore, the market might not be fully accounting for the delayed effects of geopolitical instability. As supply chains lengthen and liquidity tightens, higher funding costs will push NBFCs to use more expensive market borrowing. This squeeze, combined with the potential for rising defaults in unsecured and MSME portfolios due to economic shocks, presents a significant risk. Improvements in asset quality, like SBI Card's recent NPA reduction, could be temporary if overall economic conditions worsen. Concerns also exist about NBFCs setting aside extra funds (management overlays) for geopolitical risks, signaling a higher-risk environment.
Outlook for the Year Ahead
Looking forward, analysts suggest that management discussions about future growth, asset quality, and funding costs will be more important than the Q4 numbers alone. Growth is expected to continue, though possibly at a slower pace. The sector's ability to manage margin drops and potential asset quality issues amid global uncertainties will determine its FY27 performance. Gold loan NBFCs are expected to perform well, supported by strong gold prices. Overall, the outlook remains cautiously optimistic, with a focus on operational efficiency and strong risk management to navigate the complex environment ahead.