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MSME Loans Face Significant Risk
MSME loans, making up nearly 24% of NBFC credit in India, are particularly vulnerable. Analysts expect pressure on this segment as ongoing fuel shortages and rising prices disrupt business operations and increase costs for small companies. Some industrial areas are already reporting these difficulties.
NBFCs are likely to become more cautious about new loans to MSME borrowers. Credit costs may rise starting in the first quarter of Fiscal Year 2027. Lenders are expected to tighten lending rules to prevent loan defaults and protect their asset quality.
Vehicle Loans Under Pressure
The vehicle financing sector also faces potential strain, especially if fuel prices keep rising and economic activity slows. While large fleet operators might absorb higher fuel expenses, individual owners will likely feel the impact most. Slower business activity could also hit borrowers' cash flow by reducing freight and transport demand.
Despite a strong recovery post-pandemic driven by favorable conditions, the current global situation heightens risks for this segment.
Housing, Gold, and Power Loans Less Affected
In contrast, loan portfolios for housing, gold, and power are considered less susceptible to immediate credit quality issues. Housing finance firms and diversified NBFCs are expected to be better placed in FY27, even as funding costs rise. A larger share of floating-rate loans may help protect their net interest margins.
Rising Funding Costs
Non-banking financial companies are also facing increased pressure on their borrowing costs. Yields on three-year and five-year AAA-rated NBFC bonds have already increased by 61-68 basis points in the calendar year 2026. This trend could reduce profitability and slow lending growth across the sector.
Fuel Price Outlook and Reserves
Oil and gas analysts predict that while industrial diesel prices have climbed, retail fuel prices may rise gradually after state elections finish in April 2026, if crude oil prices stay high. The government's excise duty cut offers a temporary break, but significant price increases might still be needed if crude oil stays near $100 a barrel.
Despite supply worries, India has substantial fuel reserves, about 74 days' worth, offering a good cushion against long disruptions. Early signs also suggest improved LPG supply, as more Indian ships are sailing through the Strait of Hormuz, restoring commercial sector supply to an estimated 50% of pre-conflict levels.