Which NBFCs will gain the most from rate hike cycle? JM Financial lists top picks

Soaring bond yields and rate hike worries have led to a downturn in Indian NBFC stocks, with JM Financial noting that investors must juxtapose the NIM dynamics with growth or asset quality trends to take a holistic approach in terms of stock selection amid the headwind of policy rate hike cycle.

The US Federal Reserve last week announced its first interest rate hike since 2023, with officials expecting one more increase later this year. The American central bank’s Federal Open Market Committee (FOMC) increased the benchmark interest rate by 25 basis points to a range of 3.75-4%. The US bond yield on 10-year treasury notes meanwhile crossed the crucial psychological mark of 5%.

JM Financial noted that Indian NBFC stocks fell up to 9% over the past one month on account of increased anticipation of a policy rate hike and rising yields. The domestic brokerage noted that growth in bank loans to NBFCs and housing finance companies accelerated sharply to around 27% in FY26 and 32% YoY in the first quarter of FY27, sharply higher from just 6% YoY in FY25, with incremental share of new bank credit going to NBFCs jumping from 5% to 14-15% in the same time.


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The brokerage noted that several names including Piramal Finance, LIC Housing Finance, HDB Financial Services, L&T Finance and SBFC Finance raised their bank-loan share sharply, mostly at the expense of NCDs, while a smaller group of companies like Poonawalla Fincorp and Aditya Birla Capital pivoted into NCDs instead, a strategy that looks well-timed now that yields have turned up.

With bank-loan share of NBFCs’ liabilities rising again, a rate hike would now feed faster into the overall cost of funds of NBFCs across a larger share of the book than before, JM Financial noted. However, it added that most of the large names face a meaningful repricing gap, while rating-upgrade beneficiaries remain positioned to refinance cheaper.

How will soaring yields or a rate hike impact NBFCs?

Negative impact on FY28 cost of funds due to soaring yields or rate increase would be around 25-45 bps, against a repo rate hike of 50 bps for various NBFCs, according to JM Financial. The quantum would depend upon funding mix, composition of bank borrowings, maturity profile of bond borrowings and repricing risk on those bond borrowings, it added.

The domestic brokerage said Tata Capital, L&T Finance, Poonawalla Fincorp, Aavas Financiers, Fusion Finance and Home First Finance Company India seem to have higher sensitivity to rate or yield increase than others, given higher share of NCDs or securitization or assignment in borrowings, higher share of T-bill or repo linked bank borrowing and higher share of maturing NCDs in FY27-28 with higher refinance risk.

Which NBFCs are the biggest beneficiaries?

Combining the impact on yield and cost of funds, JM Financial believes that all housing finance companies, especially prime ones like LIC Housing Finance, PNB Housing Finance and Bajaj Housing Finance, appear to be the biggest beneficiaries in terms of a positive impact on FY28 NIM and RoAs. Aadhar Housing Finance and Home First Finance Company India seem to be better placed than Aavas Financiers and Aptus Value Housing Finance India.

All vehicle financiers however will likely see negative NIM and RoA impact, though Shriram Finance can minimise the impact due to the recent rating upgrade and equity infusion, according to the domestic brokerage. All MFIs especially CreditAccess Grameen and Fusion Finance, gold and MSME lenders should also see negative NIM and RoA impact due to higher share of fixed or floating loan or liability book.

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JM Financial's top NBFC stock picks

Within diversified NBFCs, JM Financial believes that Aditya Birla Capital and Piramal Finance should see positive impact while L&T Finance and HDB Financial should see negative impact on NIM and RoA. Bajaj Finance and Tata Capital should also see minor negative impact on their NIM and RoA less due to loan mix but more due to higher negative impact on its CoF, it added.

“Our stock selection is not only based on NIM dynamics. Loan growth forms a key component in our selection especially when asset quality is largely benign across the sector,” JM Financial concluded, naming Aditya Birla Capital, Piramal Finance, PNB Housing Finance, Aadhar Housing Finance, Mahindra & Mahindra Financial Services, Cholamandalam Investment and Finance Company, CreditAccess Grameen, Five Star Business Finance and Fedfina as its top picks.

Also read | India may see 50 bps of rate hikes in 2026 as Fed tightens: Garima Kapoor

Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.