New Delhi

Rising borrowing costs and a possible increase in the Reserve Bank of India's (RBI) policy repo rate could put pressure on the profitability of non-banking financial companies (NBFCs), particularly vehicle financiers and microfinance lenders, while housing finance companies could benefit from higher interest rates, according to a report by JM Financial Institutional Securities.

In its thematic research report titled "The Rate Hike Playbook for NBFC/HFCs", JM Financial said the impact of a potential rate hike would vary across lenders depending on their borrowing patterns and the type of loans they provide.

"We expect the impact of a rate hike cycle on the NBFCs to be uneven, largely due to differences in their asset and liability structures," the report said.

The report estimated that a 50-basis-point increase in the repo rate could result in a decline of up to 20 basis points or an increase of up to 10 basis points in the return on assets of NBFCs and housing finance companies under its coverage. The impact on their earnings per share in FY28 could range from a decline of 8 per cent to an increase of 7 per cent.

"Among cohorts, housing financiers look best placed to gain from a hike, while MFI/vehicle/Gold financiers appear most exposed, and diversified/MSME financiers present a mixed, company-specific picture," the report said.

JM Financial noted that borrowing costs have already started increasing, with yields on government securities, corporate bonds and NBFC borrowings rising by around 20–90 basis points since June 2026.

The report also highlighted that bank lending to NBFCs and housing finance companies grew by approximately 32 per cent year-on-year in the first quarter of FY27, compared with just 6 per cent growth in FY25.

The increased dependence on bank funding could make NBFCs more vulnerable to higher interest rates, as the interest charged on many bank loans can rise faster than that on their longer-term borrowings.

"A rate hike would now feed faster into the overall cost of funds of NBFCs across a larger share of the book than before," the report said.

Housing finance companies, however, could benefit because a large portion of their loan books carries floating interest rates, allowing them to increase lending rates when borrowing costs rise.

JM Financial estimated that five of the seven housing finance companies it examined could see an improvement in their return on assets under a 50-basis-point rate hike scenario.

In contrast, vehicle financiers and microfinance companies could face pressure as a large share of their existing loans carries fixed interest rates, limiting their ability to pass on higher borrowing costs to customers.

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"Fixed-rate lending paired with fast-repricing, bank-loan-heavy borrowing produces the widest negative spread and RoA impact of any NBFC group," the report said, referring to microfinance lenders.

The report added that the impact on individual companies would also depend on their loan growth, asset quality and funding structure, with higher interest rates affecting different segments of the NBFC sector differently.