- India's NBFC outlook improves with easing West Asia tensions and strong collections
- April-May collection trends up across personal, business loans, and microfinance portfolios
- Jefferies favors diversified lenders over rural-focused ones amid monsoon, El Niño risks
The outlook for India's non-banking financial companies (NBFCs) has improved as geopolitical tensions in West Asia ease and collection trends remain stronger than expected, according to Jefferies. In a sector note, the brokerage said growth and asset quality across most NBFC segments have held up well despite concerns earlier this year.
Collection trends during April and May were healthier than last year across personal loans, business loans and microfinance portfolios, helped by tighter underwriting standards and lower borrower leverage over the past 12 to 18 months.
Jefferies noted that the sector is benefiting from easing macro headwinds, and that softer bond yields and expectations of delayed interest rate hikes are likely to support net interest margins (NIMs), while credit costs could moderate as portfolio quality improves.
Stock Picks
Jefferies prefers diversified lenders that are less dependent on rural demand. Among its top picks are Bajaj Finance, Aditya Birla Capital, Cholamandalam Investment and Finance Company, and Shriram Finance.
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It prefers diversified lenders as a weak monsoon and the possibility of an El Niño weather pattern would remain the biggest near-term risks for the sector. June rainfall accounts for a relatively small share of annual precipitation, making July crucial for rural demand and asset quality trends.
The brokerage analysed previous weak-monsoon and El Niño cycles and found that vehicle financiers and rural-focused lenders historically faced higher stress during such periods. While current portfolios appear more resilient, NBFCs with greater exposure to rural borrowers could still face pressure if rainfall disappoints.
Valuations
While valuations have rebounded from post-conflict lows and are now close to historical averages, Jefferies believes the sector remains attractive due to healthy growth prospects, easing credit costs and improving operating conditions. The brokerage expects diversified NBFCs to remain better insulated from weather-related risks and macro volatility than more specialised lenders.
The brokerage expects coverage profit for the sector to grow at a compound annual rate of about 23% between FY26 and FY28. Loan growth is projected at around 18% over the same period, supported by improving demand and a pickup in unsecured lending segments that had slowed earlier.
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