Non-banking financial companies are demonstrating early resilience with collection trends holding firm across key segments including vehicle finance, microfinance, and affordable housing, according to Rajiv Mehta from Yes Securities. Speaking on ET Now, Mehta highlighted that while the sector continues to face external risks, underlying credit performance has remained stable particularly in the March–May period. He noted better-than-expected repayment behaviour across lending categories, though cautioned that the next few quarters remain crucial in assessing durability. As per Mehta, even in April and May, which is very heartening because we were expecting some impact to come through on the ground in terms of collections and repayments, but we have not seen it so far. However, he emphasized that affordability challenges and government policy pass-through remain key variables to watch over the medium term.
Within NBFCs, Mehta believes the strongest cyclical recovery is unfolding in microfinance and microfinance-linked small finance banks, after a prolonged downcycle. He emphasized that investors should focus on select players positioned for a sharp earnings recovery, stating that microfinance and microfinance-facing small finance banks can show a very sharp turnaround in their numbers in FY27. Mehta highlighted specific names including Ujjivan, CreditAccess Grameen, and Fusion as pure play microfinance companies, while also preferring affordable housing names Home First and Aptus for renewed growth momentum. He noted that the best way to play the entire NBFC segment is by playing sub-segments like microfinance wherein the cyclical recovery is looking very sharp at this point in time. Mehta added that some of the SFBs having large microfinance portfolios can actually show a very sharp turnaround in their numbers in FY27.
The gold loan segment remains structurally strong but increasingly competitive, with gold loan portfolio growing by 50% to 100% largely driven by gold price increases. As reported by Mehta, companies like Muthoot and Manappuram can face more competition than ever before as large NBFCs expand into the space. The segment continues to offer growth opportunities from both volume and value perspectives, though competition is intensifying across the industry. Mehta explained that gold loan companies are generally very large proxy play on the gold price, noting that customer-level and tonnage-level growth are key metrics to track beyond just price movements. He added that as a space, it remains very interesting. There is growth to be taken out from a volume point of view, from a value point of view both, but players like Muthoot, Manappuram can face more competition than they ever faced before.
On the impact of higher interest rates, Mehta emphasized that margin transmission dynamics will matter more than headline rates, focusing on how rates are moving and the ability to pass on rates to customers. He noted that asset quality stress is unlikely to come purely from higher rates but more from broader macro pressure on household incomes. The analyst highlighted that inflationary pressures and affordability constraints in lower-income segments remain key variables to watch over the medium term, with the next three to six months being crucial for assessing the durability of current trends. Mehta added that I am not worried about rates so much, but I am more worried about how the on-ground situation moves in, how inflation will hit lower-income households, how inflation will hit lower middle-income households. He emphasized that the difference between how rates are moving and the ability to pass on rates to the customer will determine how the margins will move throughout the year.
While acknowledging that the NBFC credit cycle had been turning positive, Mehta cautioned that macroeconomic and geopolitical issues could delay the pace of improvement. He expressed optimism but noted a more guarded approach given the current macroeconomic environment. The overall sector tone remains cautiously optimistic with credit performance stable and selective segments like microfinance and affordable housing showing strong momentum, though investors are advised to remain watchful of inflation, affordability stress, and economic transmission pace over coming quarters. Mehta noted that the cycle had actually turned around on its head and we were entering a very strong phase in FY27, but now with all this macroeconomic, geopolitical issue-driven inflation coming through and likely to hit households, we will have to wait and watch. He added that otherwise, definitely we were coming out of a cycle and entering a very bullish phase for all companies in FY27.
