New Delhi [India], October 6 (ANI): Non-banking financial companies (NBFCs) are expected to report another strong quarter in Q2FY27, supported by healthy loan growth and benign credit costs, but rising borrowing costs, monsoon-related stress and regulatory changes could make the outlook more challenging, according to a Kotak Institutional Equities sector report.

The report said most NBFCs could see 12-43 per cent year-on-year growth in core profit before tax, backed by 15-37 per cent loan growth, although some of the conditions that supported the sector over the past two quarters are beginning to turn less favourable.

"2QFY27 will be another strong quarter for NBFCs, with 12-43% growth in core PBT for most... driven by 15-37% yoy loan growth on the back of strong disbursements and momentum in the last four quarters," Kotak said in its diversified financial sector update.

However, the report said management commentary could become more cautious as adverse weather conditions begin to affect some rural markets.

"Floods in the north, droughts in parts of Maharashtra and Karnataka and some weakness in MP have likely tempered quarter-end momentum," it said, adding that the weakness could either marginally affect Q2 performance or lead companies to temper their outlook.

The risk is particularly relevant for vehicle finance, rural MSME and other portfolios that are more exposed to farm incomes and local economic conditions. Kotak said some weakness emerged in rural and sub-prime segments towards the end of the quarter, although overall asset quality remained stable.

"We expect the headline asset quality ratio to be stable/hold on well," the report said, while noting that a rise in stressed loans in tractor, commercial vehicle and rural MSME portfolios could not be ruled out.

Funding costs are another emerging pressure. Kotak said incremental borrowing costs have started rising as bond yields move higher, even as the average cost of funds still benefits from earlier declines.

"Cost of funds has inched up marginally for most players, with an increase in incremental cost of funds," it said. The report noted that 10-year government bond yields rose 44 basis points during the quarter.

At the same time, urban lending remains a key support, with strong growth in home loans, cars, consumer durables, personal loans and higher-ticket MSME loans.

Kotak also flagged proposed regulatory changes, including restrictions on flexi and revolving credit facilities and lower insurance commissions, as additional risks for some lenders.

The report therefore points to a divergence between near-term earnings and the forward outlook: NBFCs are entering the September-quarter results season with strong growth, but higher rates, weather-related rural stress and regulatory changes could make sustaining the recent pace more difficult. (ANI)