In the fourth quarter of fiscal year 2025, the Indian financial sector maintained a steady performance amid mixed market conditions. Systemic credit growth in the banking and non-banking financial company (NBFC) segments moderated to 11.1% year-on-year, indicative of prudent lending practices. The banking sector’s elevated credit-deposit ratio of 80.5% highlights the ongoing importance of deposit mobilization to sustain growth momentum.
In particular, the affordable housing finance segment (HFCs) and gold loan providers (NBFCs) emerged as strong performers, with gold loan assets under management (AUM) increasing by approximately 29% year-on-year. Vehicle financiers (NBFCs) reported stable disbursements, bolstered by their fixed-rate loan portfolios, which saw around 20% growth in AUM year-on-year. Conversely, mid-ticket mortgage loans (HFCs) and unsecured retail credit (banks/NBFCs) experienced slower growth as lenders adopted a cautious approach.
The microfinance sector (NBFC-MFIs) encountered elevated credit costs ranging from 9–34% but demonstrated improved collection efficiency, particularly in Karnataka, where collection rates showed significant recovery in March.
Net interest margins (NIMs) remained stable across most segments; however, gold lenders (NBFCs) and affordable housing providers (HFCs) experienced slight compression of 10–15 basis points due to rising funding costs. Asset quality was largely stable, with housing finance companies (HFCs) and power financiers (NBFCs) reporting measurable improvements. The sector is well-positioned to benefit from the evolving rate cycle, with anticipated Reserve Bank of India rate cuts potentially providing benefits over the next 3–6 months.
The financial sector is projected to achieve a measured 12% credit growth in fiscal year 2026, led by secured lending segments. Vehicle financiers (NBFCs) may experience NIM expansion from potential rate cuts, while deposit mobilization remains vital for banks to maintain liquidity. The microfinance sector could normalize by the second half of fiscal year 2026 if the improving collection trends persist. Although challenges remain in deposit growth and specific asset quality pockets, the sector’s fundamentals remain strong, supported by stable macroeconomic conditions and improving operational trends.
The Nifty Financial Services Index is expected to reflect this resilience, presenting opportunities in segments demonstrating sustainable growth and prudent risk management.
Among stock picks, Shriram Finance is recommended for purchase with a target price of Rs 775, up from the last traded price of Rs 653, indicating an 18% upside. The company is well-positioned to capitalize on the recovery in vehicle finance, as demand for commercial and passenger vehicles gains momentum. With a diversified lending portfolio, Shriram Finance is anticipated to benefit from lower borrowing costs, enhancing net interest margins and profitability. The company’s diversified product suite helps mitigate the cyclicality of the commercial vehicle business. A strong focus on asset quality and collection efficiency suggests that the company is well-prepared to navigate the evolving credit environment. Additionally, assets under management (AUM) and profit after tax (PAT) are expected to grow at a compound annual growth rate of 18% and 19% respectively over fiscal years 2024 to 2027.
HDFC Bank is also advised for purchase with a target price of Rs 2,050, up from the last traded price of Rs 1,817, representing a 12% upside. The bank is prioritizing profitability over volume, with moderated loan growth projected at 4%, 10%, and 13% over fiscal years 2025 to 2027. This strategy involves optimizing its credit-deposit ratio and shifting toward higher-yielding retail and commercial assets. Recent deposit growth of 14.1% year-on-year and a rising current account and savings account (CASA) ratio of 34.8% indicate improved funding stability, supporting margin expansion with an expected NIM recovery by fiscal year 2027. Asset quality remains robust, with gross non-performing assets at 1.4% and net non-performing assets at 0.5%, alongside steady credit costs of approximately 50 basis points. By replacing high-cost borrowings with deposits and enhancing operating leverage, return on assets and return on equity are expected to rise to 1.8% and 14.2%, respectively, by fiscal year 2027, balancing disciplined growth with sustained profitability.
The author of the analysis is the Head of Retail Research at Motilal Oswal Financial Services. It is important to note that the recommendations and views expressed by experts are their own and do not necessarily reflect those of the Economic Times.