Auto Lenders Expect Higher Profits As RBI Cuts Interest Rates

In a bold move to stimulate economic growth and improve financial liquidity, the Reserve Bank of India (RBI) reduced the repo rate by 50 basis points to 5.5% and cut the Cash Reserve Ratio (CRR) by 100 basis points to 4% on Friday, June 6. This is a positive development for Non-Banking Financial Companies (NBFCs)-especially those in the auto financing segment, as it will increase liquidity and lower their borrowing costs.

'We believe this move to be positive for NBFCs, which have faced increased borrowing costs in recent quarters. Lower repo and CRR rates translate into a lower cost of funds, directly supporting better profitability and greater lending flexibility. Among NBFCs, we expect auto financiers to have the biggest advantage as a decline in cost of funds (CoF) will help improve Net Interest Margins (NIMs), given their rate of lending is fixed,' quotes Prabhudas Liladar(PL) report.

Auto Loan Companies to Benefit from Lower Borrowing Costs

In Q4 FY25, management from auto financing companies had already noted that borrowing costs were starting to come down and had expected the trend to continue. Overall, the outlook is positive thanks to better margins and stable credit quality, although slow growth remains a concern. Diversified NBFCs like Cholamandalam Investment and Finance Company (CIFC) and Shriram Housing Finance Ltd (SHFL) are expected to do particularly well, added PL report.

A key aspect of this shift is the changing borrowing strategy among NBFCs. With interest rates previously climbing, many had reduced their dependence on bank term loans. However, with the RBI's rate cuts making this form of borrowing cheaper, NBFCs are likely to return to banks for funding. Term loans from banks accounted for 21%-44% of funding for auto financiers in FY25, a share expected to grow in the upcoming quarters.

NBFCs May Borrow More from Banks Again

In FY25, auto financiers relied on term loans from banks for about 21% to 44% of their total funding. As interest rates rose during the year, NBFCs cut back on these loans to control their borrowing costs. However, with the recent rate cuts, bank loans are becoming more affordable, NBFCs are likely to return to banks for funding in the coming quarters.

Lower Funding costs and fixed rate Loan to boost Margins

Data from Q4 FY25 provides a snapshot of current cost of Funds (CoFs) for CIFC at 7.1%, SHFL at 9.1%, and Sundaram Finance (SUF) at 7.3%. Management commentary from these companies already pointed to lower incremental borrowing costs, a trend set to strengthen in FY26. SHFL expects a 15-20 bps decline in funding costs, while CIFC projects a 15 bps reduction, largely due to its exposure to repo- and T-bill-linked borrowings.

Loan book structures of auto financiers make them well-positioned to benefit from lower interest rates. As of FY25, 55% of CIFC's and 80% of SHFL's loans are at fixed interest rates. This means that as their cost of borrowing goes down, their profit margins go up, since the income from these loans stays the same. While FY26 NIM is likely to see a positive movement for auto financiers, we expect slowdown in the sector to be a key challenge. We continue to prefer diversified players (CIFC and SHFL) as they have multiple levers to deliver on growth.

CIFC and SHFL Expect Strong Growth in FY26

CIFC highlighted a slowdown in the Commercial Vehicle (CV) portfolio due to lower capacity utilization in FY25, they expect an improvement in FY26 with favorable monsoon forecasts and increased infrastructure spending. It also expects strong growth in Housing Loans, Loans Against Property, and new business verticals. Analysts forecast a 25% AUM growth for FY26 and 24% for FY27.

SHFL is also positive expecting a growth of 12%- 15% in the CV portfolio in FY26 led by replacement demand and a pick-up in infrastructure spend. It expects the Passenger Vehicles (PV) and MSME segments to see 20%+ growth, with the company targeting over 15% overall AUM growth. Analysts are slightly more conservative but still forecast robust 16.5% growth.