According to Motilal Oswal, credit growth trends remained mixed across segments during the quarter, although there was a clear demand revival | Photo credit:
“We expect AUM growth for covered NBFCs to pick up from 3.6 per cent qoq (+17.2 per cent YoY) in Q2-26 to 4.8 per cent qoq (+17.4 per cent YoY) in Q3-26, led by seasonality (festival demand), a reduction in GST rates and a growth recovery among consumers unsure of improving quality trends of their assets, even as it slows in mortgages and MSME pockets,” brokerage IIFL Capital said in a report.
loan growth
According to Motilal Oswal, credit growth trends remained mixed across segments during the quarter, although signs of demand revival were visible. Gold financiers are expected to account for another quarter of strong credit growth, while auto financiers reported improved disbursement momentum, supported by pent-up demand, VAT rate cuts and the tailwinds of the festival season.
Moreover, payouts in the non-guaranteed segments also accelerated again during the quarter. In contrast, microfinance institutions (MFIs) continued to see subdued disbursements and AUM growth due to high rejection rates as lenders prioritized asset quality over growth. Disbursements to both large housing finance companies and affordable housing finance companies were relatively weaker (than previous expectations), impacted by increased competition from banks and the loss of sales due to holidays during the quarter.
Asset quality
IIFL Capital believes that asset quality pressure for NBFCs is improving incrementally as early default trends improve across unsecured consumer loans, MFIs and parts of auto finance, aided by seasonality, even as delinquencies remain high in MSME (micro-LAP, mid-ticket unsecured loan) segments.
“Consequently, we expect credit costs to improve by 10-15 basis points quarter-on-quarter for most NBFCs under our coverage, barring an increase of 15 basis points quarter-on-quarter for five-star (micro LAP) and an increase of 20-30 basis points quarter-on-quarter for Shriram Finance, L&T Finance and PNB Housing Finance based on idiosyncratic factors (SHFL: normalization; LTF: buffer provisions largely depleted; PNB HF: Lower net recoveries),” it said.
Elara Securities said one segment to watch is loans under ₹10 lakh (micro loans against real estate, loans against real estate, which are essentially a play space for a few small finance banks and NBFCs).
Finally, financing costs are expected to decline for most NBFCs, Motilal Oswal said. Net interest margin (NIM) trends for NBFCs are expected to be mixed this quarter and vary across sub-segments. While larger HFCs are likely to experience a contraction in margins due to increased competitive intensity and interest rate cuts, affordable HFCs and auto financiers will see NIM expansion, aided by segment-specific dynamics.
“Our preference is for vehicle financiers, gold financiers [primarily to play the strong momentum in gold loan growth]and diversified lenders [that have navigated the unsecured credit cycle and are now looking to grow their unsecured loan book again]. Our top picks in the sector are: Shriram Finance, PNB Housing Finance and Aditya Birla Capital,” the brokerage said.
Published on January 6, 2026
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