Non-banking financial companies (NBFCs) are expected to report a strong first quarter performance for FY27, driven by robust loan growth and healthy margin expansion, according to a Kotak Institutional Equities report released on July 6. The sector demonstrated operational resilience despite global headwinds such as the escalating West Asia conflict and persistent inflation concerns that weighed on investor sentiment during much of the quarter.
Growth Guidance Expected to Rise
The report noted that NBFCs are likely to raise their growth guidance, which had been mixed in the previous quarter due to the overhang of the West Asia war. Most diversified NBFCs are already firmly above 20% loan growth, and the report expects guidance to inch up to around 25% for the larger pack.
Margin Expansion Driven by Lower Borrowing Costs
A favorable shift in earnings dynamics is underway, primarily driven by an expansion in net interest margins. According to the report, most NBFCs will report healthy net interest margin expansion of 9 to 80 basis points year-on-year (YoY), though some compression remains visible in specific players. The primary catalyst for this performance is the reduction in liabilities costs, as borrowing costs declined by 22 to 90 basis points YoY for most players over the past four quarters. The benefit of lower exit cost of borrowings drives the margin expansion in Q1FY27.
Asset yields present a varied landscape across the industry. Yields contracted 5 to 80 basis points YoY, but likely inched up quarter-on-quarter for most firms, except affordable housing finance companies that recently cut benchmark rates. While the incremental cost of funds rose toward the end of the year, the same softened by June 2026, aided by a rally in bond markets.
Competitive Intensity and Fee Income
Looking ahead, increases in marginal cost of funds-based lending rates by banks by 5 to 10 basis points in select buckets will weigh on margins. With comfortable liquidity, competitive intensity remains intense, which puts pressure on asset yields. Strong disbursements and insurance fees fuel fee income growth, though impending insurance commission guidance requires close monitoring.
The report further added that "Affordable HFCs, with encouraging incremental growth trends, will likely be more assertive about growth. Concerns of a weak monsoon and food inflation will be the only outliers."
Segment-Wise Performance
Individual segments showed a clear revival in momentum across the board. Unsecured lending segments regain traction, while vehicle finance gains support from major automotive manufacturers reporting healthy 15 to 20 per cent volume growth across most segments alongside a stronger exit month.
Gold loans held well despite process changes from new regulations and a fall in gold prices. Affordable housing finance companies, which faced a slowdown over the last two years, show early signs of improvement since the fourth quarter of the financial year 2026, with momentum expected to pick up through the financial year 2027.
