Non-Banking Financial Companies (NBFCs), excluding microfinance institutions (MFIs), are projected to see credit expansion of 13-15 percent in FY26, with total credit crossing Rs 60 trillion by the end of the fiscal, say analysts.
In a media briefing on April 23, Alka Anbarasu, Associate Managing Director, Financial Institutions Group, Moody’s Ratings, and Karthik Srinivasan, Senior Vice President and Group Head, Financial Sector Ratings, ICRA, said that while the the MFI and personal loan segments face significant asset quality stress, the broader NBFC sector is projected to maintain stable growth.
Though the NBFC sector faced headwinds in FY25, particularly in unsecured lending, “the worst may be behind them regarding asset quality,” said Srinivasan. Lower credit costs, aided by two recent interest rate cuts and the possibility of additional reductions, should provide some relief to the sector, he added.
According to a report presented during the meeting, the NBFC sector is expected to see its return on assets (ROA) moderate to 2.6–2.8 percent in FY26, down from over 3 percent in prior years.
This decline is primarily attributed to elevated credit costs in the personal loan and MFI segments, which have seen significant asset quality deterioration, said Srinivasan.
“However, other NBFC segments, such as home and vehicle loans, are expected to remain resilient, supported by strong fundamentals and steady demand,” he explained.
The MFI sector, which enjoyed a stellar FY24 with high margins and low credit costs, has seen a sharp reversal in fortunes in FY25.
According to a Moneycontrol report published earlier, several large MFI players have reported losses over the past nine months, dragging the sector’s ROA to near zero.
Anbarasu projects a modest recovery in FY26, with ROA expected to rebound to 1.2–1.3 percent, well below the highs of previous years.
“While the MFI sector has been grappling with asset quality stress, the short-term nature of these loans, which is typically two to two-and-a-half years, means that much of the stressed portfolio may have already been recognised, suggesting that the worst could be over unless macroeconomic conditions worsen,” said Anbarasu.
The Microfinance Institutions Network (MFIN) has introduced stricter lending norms effective April 1, 2025, including tighter credit filters, reduced borrower loan limits, and a cap on total indebtedness.
These measures should curb over-leveraging and bolster sector resilience, but may temper loan growth in the near term, Srinivasan said.
“This quarter will be critical for MFIs, as lending typically slows and new guardrails take effect,” he added.
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