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NBFCS ARE THE NEXT BIG BET FOR INVESTORS

- By Krishna Kumar Mishra

NBFCs are coming off a phase of consolidation and are at the cusp of an upcycle. Their valuations may still underestimate the earnings surge that a lower-rate regime and credit boom can bring. As India pushes toward greater financial inclusion and credit penetration, NBFCs are not just participating – they are leading the charge.

AS India enters a phase of economic tailwinds and an easing rate cycle, the country's non-banking financial companies (NBFCs) are surging ahead of traditional banks. Robust credit demand, favourable demographics, and digital innovation have positioned NBFCs for outsized growth. Investors seeking to ride India's domestic boom may find that now is the opportune moment to increase exposure to these “shadow banks” poised to shine.

NBFCs Outperforming Amid Tailwinds

NBFCs appear far more favourably positioned in this rate easing cycle. A key difference is in loan structures - many NBFCs (especially consumer financiers) operate with fixed-rate loan books, meaning their interest yields remain stable when policy rates fall. At the same time, their own borrowing costs tend to drop alongside benchmark rates. The result is a potential expansion in spreads or at least resilient margins, whereas banks see immediate yield compression (loans repricing down) without equivalent funding cost relief.

NBFCs like Bajaj Finance and SBI Cards, with a large share of fixed-rate assets, won't suffer margin erosion from rate cuts - in fact, they stand to benefit. Thus, in a climate of anticipated RBI rate cuts through 2025, NBFCs could enjoy a Goldilocks scenario of lower funding costs and steady yields, boosting profitability.