Growth And Asset Quality Headwinds For Consumer Finance, Recovery Expected In Second Half, Says Jefferies

Jefferies has flagged near-term challenges for India's consumer finance sector, citing subdued loan demand and rising asset quality risks, but remains optimistic about a recovery in the second half of the fiscal year. The brokerage highlighted macroeconomic pressures, potential stress from trade tariffs, and the impact of GST rationalisation on disbursement and loan-to-value ratios.

“Loan demand has been subdued,” Jefferies said, noting that while July freight rates were steady month-on-month and up 6% year-on-year, “CV operators indicate pressure on rates and margins.” The firm added that “tractor registrations have been good (over 32% YTD), signaling better rural sentiment on good monsoon.”

The brokerage believes the proposed GST cuts could provide a boost to demand, especially in the two-wheeler and passenger vehicles segments. “The proposed GST cut for CVs (from 28% to 18%) can improve affordability of new CVs, but price deflation will be a drag on disbursement value,” it said. The firm expects disbursements to pick up from “20 to 30” in anticipation of the cut.

On asset quality, Jefferies warned of rising stress in MSMEs and retail segments. “Stress has increased across segments including MSME due to slowing macro; tariffs can increase stress in select pockets,” the note said. Citing TransUnion CIBIL data, Jefferies pointed out that “delinquencies have increased in smaller ticket business loans—90-720 DPD for loans under Rs 1 million has increased by 70bps YoY.”

The brokerage also flagged risks from trade tariffs, particularly in export-heavy sectors like textiles and gems. “Exports in affected sectors account for $19–20 billion and employ over 50 million people,” it said, adding that “we see some asset quality risks in retail and MSME, especially in select pockets due to tariffs.”

Despite these headwinds, Jefferies expects margins to improve in the second half. “Margins in 1H were rangebound and should start to improve 2H onwards, especially for fixed-rate lenders like auto NBFCs, cards, and gold NBFCs,” it said. The firm added that “spreads at affordable housing finance companies should also improve as yields are stickier versus prime housing loans.”

Valuations in the sector remain reasonable, according to Jefferies. “Sector faces near-term growth and asset quality headwinds, but NIM expansion can cushion the pressure on earnings,” it said. “Sector valuations are reasonable near 10-year average P/B.”

Jefferies' top picks include Bajaj Finance, Cholamandalam Investment and Finance Company, and Shriram Housing Finance, with Muthoot Finance seen as a defensive play. “We prefer select diversified NBFCs like BAF given its ability to toggle across segments, and as pressure in MSME BL (12% of AUM) is not as high as feared,” the note said