Speaking on ET Now, Rajiv Mehta from Yes Securities highlighted that while the sector continues to face external risks, underlying credit performance has so far remained stable, particularly in the March–May period. He also flagged microfinance and select housing finance players as the most attractive sub-segments within the broader financial space.
Collections remain steady, but macro risks linger
Mehta pointed to better-than-expected repayment behaviour across lending categories, though he cautioned that the next few quarters remain crucial in assessing durability.“Across the NBFC spectrum, be it vehicle finance, be it microfinance, be it affordable housing, be it housing finance, we are seeing pretty strong trends and resilient trends in collections even in April and May, which is very heartening because we were expecting some impact to come through on the ground in terms of collections and repayments, but we have not seen it so far. But of course, it remains a key monitorable for the next three to six months because the affordability challenges, the pass-through from the government side, it is going to be more gradual in nature. So while it remains a key monitorable, so far there has been no impact,” he said.
He added that inflationary pressures and affordability constraints in lower-income segments remain the key variables to watch over the medium term.
Microfinance and SFBs emerge as key growth pockets
Within NBFCs, Mehta believes the strongest cyclical recovery is unfolding in microfinance and microfinance-linked small finance banks, after a prolonged downcycle.He said investors should focus on select players positioned for a sharp earnings recovery.
“We believe that the best way to play the entire NBFC segment is by playing sub-segments like microfinance wherein the cyclical recovery is looking very sharp at this point in time. They have come out of a very deep, long cycle and some of the NBFC MFIs which we like and then some of the SFBs having large microfinance portfolios, they can actually show a very sharp turnaround in their numbers in FY27. So we like microfinance and microfinance-facing small finance banks most,” Mehta said.
He also highlighted affordable housing finance companies as another preferred segment, citing renewed growth momentum.
Lending and housing finance preferences
On specific names, Mehta indicated continued preference for microfinance-heavy lenders and select housing finance companies.
“On the lenders side which I cover, we are looking at the best opportunity coming or arising in microfinance and microfinance-facing small SFBs. Some of them which we like is Ujjivan. We are even hosting them in the conference. We also like the names like CreditAccess Grameen, Fusion. They are pure play microfinance companies. And we also like some of the affordable housing names which are Home First and Aptus wherein we believe that the growth has made a comeback,” he said.
Ratings space offers selective opportunities
Beyond lending, Mehta pointed to credit rating agencies as a relatively stable macro-linked play within financials.
“Speaking about non-lending, I cover rating agencies, so rating agencies is a completely different industry, it is a very macro industry but there are a couple of very interesting plays which we are kind of backing and preferring. One is Care which is the most proxy on the domestic ratings market and we also like Crisil which is a combination of a ratings company as well as it is having two large global businesses which seem to be going on good growth pace,” he noted.
Interest rates: manageable risk, but inflation key concern
On the impact of a higher interest rate environment, Mehta said margin transmission dynamics will matter more than headline rates.
“No, I think that is a very important monitorable from our point of view. We are looking at how the rates are moving and we are also looking at on the other side the ability to pass on rates to the customer and that difference will determine how the margins will move throughout the year,” he said.
He added that asset quality stress is unlikely to come purely from higher rates, but more from broader macro pressure on household incomes.
“I am not worried about rates so much, but I am more worried about how the on-ground situation moves in, how inflation will hit lower-income households, how inflation will hit lower middle-income households. That is something that I would want to closely track in the next three to six months,” he added.
Gold loans: strong demand, rising competition
Discussing gold loan companies, Mehta said the segment remains structurally strong but increasingly competitive.
“Gold loan companies are generally very large proxy play on the gold price. What you saw last year, gold loan portfolio growing by 50% to 100% was largely driven by the price of gold going up so much. But at the core, we also track how customer-level growth has been, how tonnage-level growth has been,” he said.
He added that competition in the segment is intensifying as large NBFCs expand into the space.
“As a space, it remains very interesting. There is growth to be taken out from a volume point of view, from a value point of view both, but players like Muthoot, Manappuram can face more competition than they ever faced before,” Mehta said.
Cycle outlook: recovery intact, but vigilance needed
While acknowledging that the NBFC credit cycle had been turning positive, Mehta cautioned that macro uncertainties could delay the pace of improvement.
“The cycle had actually turned around on its head and we were entering a very strong phase in FY27, but now with all this macroeconomic, geopolitical issue-driven inflation coming through and likely to hit households, we will have to wait and watch. Otherwise, definitely we were coming out of a cycle and entering a very bullish phase for all companies in FY27. But now I am optimistic but I would be more guarded,” he said.
Outlook
The overall tone from the sector remains cautiously optimistic. While credit performance is stable and selective segments such as microfinance and affordable housing are showing strong momentum, investors are being advised to remain watchful of inflation, affordability stress, and the pace of economic transmission over the coming quarters.
