Kotak Institutional Equities believes non-banking financial company (NBFC) are in a “sweet spot”, noting that companies under its coverage performed well in the December quarter (Q3FY26), characterised by accelerating disbursements, expanding net interest margins (NIMs), and a decline in stressed loans. While the recent rally has limited immediate upside for many stocks, the brokerage views NBFCs as strong long-term compounders.

Additionally, the boost in disbursements, post the goods and services tax (GST) cut, versus a weak H1, and a step-up in personal loans, unsecured MSME and microfinance loans provide confidence for NBFCs to guide for a further acceleration in loan growth. The brokerage’s favoured picks include Bajaj Finance and Bajaj Finserv.

Growth outlook

The brokerage forecasted stronger loan growth for nearly all covered NBFCs in FY27 compared to FY26. This confidence stems from an improving asset quality cycle across segments, which is encouraging management to provide aggressive growth guidance. Personal and micro-loans have already seen a surge in disbursements, with a lead-lag effect expected to drive even faster growth next year, Kotak noted.

Further, multi-product firms like Tata Capital, which focused on corporate and SME loans in FY26, are expected to pivot more assertively toward retail books in the coming year.

Margins: Strong tailwinds, but sustainability in question

Most NBFCs reported margin expansion in 9MFY26, aided by rapidly falling costs of funds. However, Kotak warned that these levels may not sustain through next year due to several factors:

• Yield pressure: As NBFCs chase aggressive growth in near-prime and below-prime segments, intense competition is likely to compress yields.
• Rate transmission: While floating-rate loans have seen quick transmission, fixed-rate loan adjustments remain slower.
• Potential risks: Any concerns regarding rate hikes toward H2FY27 could prompt companies to slow down their rate-cutting cycle.

Key challenges

While the overall outlook is positive, Kotak flagged small-ticket secured MSME loans as a segment facing challenges, though incremental trends there currently remain stable.