Rate Cuts, Margin Gains: Auto NBFCs Enter Sweet Spot, Says PL Capital

Mumbai | June 12 – In its latest report dated June 6, 2025, PL Capital highlights a pivotal shift underway in the Non-Banking Financial Company (NBFC) landscape—particularly for auto financiers—driven by the Reserve Bank of India’s surprise rate cut.

The central bank’s move to slash the repo rate by 50 basis points to 5.5% and the CRR by 100 bps to 4% marks a return to an accommodative stance, aimed at reviving credit momentum and boosting liquidity. But this isn’t just a broad monetary easing story.

According to PL Capital, this rate reset could structurally rewire margins for NBFCs with fixed-rate lending portfolios—and that’s where vehicle financiers take pole position.

Margin Tailwinds, Finally

Auto-focused NBFCs like Cholamandalam Investment and Finance Company (CIFC) and Shriram Finance (SHFL) are well-positioned to ride the coming wave. With 55% of CIFC’s loan book and 80% of SHFL’s lent at fixed rates, these players don’t have to pass on lower rates to borrowers—at least not right away.

Meanwhile, their cost of borrowing is dropping. CIFC reported a Q4FY25 CoF of 7.1%, while SHFL stood at 9.1%. Both management teams have guided for an additional 15–20 bps reduction in FY26 as lower funding rates filter in.

It’s a classic duration mismatch—funding costs float, but lending rates stay fixed—that turns into a margin opportunity. In a sector long pressured by rising CoF and margin compression, this pivot could reset expectations.

Reopening the Bank Borrowing Channel

FY25 was a tough year for NBFCs on the funding front. As rates rose, term loans from banks became less attractive, and many shifted toward bonds, securitisation, and commercial paper. But the cycle is turning.

With liquidity improving and borrowing rates falling, bank loans are back on the table.

CIFC, which relied on banks for 44% of its funding, and SHFL at 21%, are expected to return to this more traditional source. Banks themselves are now looking to deploy surplus liquidity, and top-rated NBFCs are among the first to benefit.

This shift in funding strategy could further reduce blended CoF over the next few quarters—amplifying the margin gains from the rate cut.

Growth: A Slower Gear, but Not a Stall

Even as the margin story strengthens, growth is still navigating speed bumps.

CIFC flagged a slowdown in its commercial vehicle (CV) portfolio in FY25, citing underutilised fleet capacity and muted freight demand. However, management is optimistic about FY26, citing potential catalysts like better monsoons and higher infrastructure spend. Growth in other verticals—housing loans, LAP (Loan Against Property), and MSME financing—is expected to pick up the slack.

SHFL paints a similarly mixed but improving picture. The company expects 12–15% growth in the CV portfolio and 20%+ expansion in PV and MSME lending. It’s guiding for overall AUM growth of ~16.5% in FY26.

Asset quality is also holding firm across the board. PL Capital notes that credit costs remain benign, and despite macro challenges, there’s no material stress building up in portfolios.

Valuations Stay Steady—for Now

Despite improving fundamentals, the market isn’t rushing to rerate NBFCs just yet.

PL Capital is maintaining a “Hold” rating on all major listed players in the segment, citing fair valuations and the need for visible volume-led growth to trigger a breakout

Here’s how the latest calls stack up:

PL Capital Ratings Snapshot – Auto & Diversified NBFCs

Bottomline-

This isn’t just about a central bank pivot. It’s about NBFCs—particularly auto financiers—reaping the rewards of balance sheet design.

Their large fixed-rate loan books, falling incremental CoF, and stable asset quality make them ideal beneficiaries of India’s softening interest rate cycle. The earnings surprise may not come from top-line growth, but from margin expansion that analysts haven’t fully priced in yet.

At PL Capital, we see this as a quiet but powerful reset for the sector—one where the best-positioned NBFCs could deliver operating leverage without changing their business model.

Click here to view the full report.