NBFCs to Stabilise Growth, Decline Credit Costs: Jefferies’ Top Picks for Indian Investors

Jefferies, a global brokerage firm, has released its latest report on the non-banking financial services (NBFCs) sector in India. According to the report, Jefferies expects the growth of NBFCs to stabilise while credit costs are expected to decline in the second half of the financial year 2026.

Key Factors to Watch

A pickup in economic activity during the festive season will be a key factor to watch to determine the growth trajectory of NBFCs. The brokerage firm also expects the net interest margin (NIM) of NBFCs to improve in the second quarter onwards. Cholamandalam Investment and Finance and Bajaj Finance have guided for a 10-15 basis points expansion during the financial year 2026.

Companies to Watch

Jefferies has chosen Bajaj Finance Ltd., Cholamandalam Investment and Finance Co. Ltd., Shriram Finance Ltd., and Muthoot Finance Ltd. as its top picks in the NBFC space. The brokerage firm prefers Bajaj Finance due to its diversified portfolio, which is expected to offset segment-level pressure. Stress in unsecured personal loans is stabilising, and stress in medium, small, and micro enterprises’ business loans is expected to be manageable.

At Cholamandalam Investment and Finance, soft demand and asset quality are expected to weigh on the stock price in the near term. However, any pullback can offer attractive entry points, especially as sequential trends can improve with NIMs recovering in the second half onwards. Growth and asset quality are likely to improve in the second half.

Shriram Housing Finance’s valuations are at 1.8 times the financial year 26 estimated book value, which seems reasonable, according to Jefferies. Muthoot Finance, on the other hand, is expected to benefit from the growth in the gold loan segment.

Challenges Ahead

Non-banking financial sectors are likely to face near-term growth and asset quality headwinds, while the NIM expansion may cushion the pressure. Companies that are bond-funded, such as LIC Housing Finance, may see some pressure in the second half as the book reprices lower.

However, these companies saw their portfolio spreads improve by 4-9 basis points on the quarter, despite a cut in home loan rates and prime lending rates, as bank liabilities declined quickly.

Investment Strategy

Indian investors looking to invest in the NBFC space should consider the top picks by Jefferies. Bajaj Finance, Cholamandalam Investment, and Shriram Finance are expected to perform well in the second half of FY26. Muthoot Finance is also a good bet, given its strong presence in the gold loan segment.

Investors should keep an eye on the economic activity during the festive season, as it will play a crucial role in determining the growth trajectory of NBFCs. They should also monitor the NIM expansion, as it is expected to improve in the second quarter onwards.

Conclusion

In conclusion, Jefferies expects the growth of NBFCs to stabilise, while credit costs are expected to decline in the second half of FY26. The brokerage firm’s top picks, including Bajaj Finance, Cholamandalam Investment, Shriram Finance, and Muthoot Finance, are expected to perform well in the second half of the financial year. Indian investors looking to invest in the NBFC space should consider these top picks and keep an eye on the key factors that will determine the growth trajectory of NBFCs.

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