NBFCs Face Rising Funding Costs Despite Strong Loan Growth in FY27

India's non-banking financial companies (NBFCs) are heading into the second half of FY27 with a difficult balancing act. Demand for loans remains healthy, but raising money to fund those loans is becoming more expensive.

An October 19 report by The Economic Times, citing brokerage research, indicates that NBFCs could report healthy earnings for the July–September 2026 quarter. The concern is what happens next. Higher interest rates may increase the cost of bank borrowings and market funding, putting pressure on lenders' profit margins.

Choice Institutional Equities analyst Ishank Gupta expects NBFC net interest margins to narrow by 10–20 basis points over the next two to three quarters. This is an analyst forecast, not a confirmed decline across the industry.

For borrowers, the development raises a question: will NBFC personal loans become more expensive?

Higher funding costs can influence new loan pricing, but there is no evidence of a uniform interest-rate increase across all NBFC personal loans.

What changed for NBFCs in October 2026?

The Reserve Bank of India (RBI) raised its policy repo rate by 25 basis points to 5.50% on October 7, 2026.

The increase has brought renewed attention to the cost of funds for financial institutions.

Unlike banks, NBFCs generally cannot accept demand deposits such as savings and current accounts. They rely on funding sources that can include bank loans, bonds, commercial paper and other permitted borrowings.

When interest rates increase, raising fresh money or refinancing existing debt may become more expensive.

The Economic Times reported that Motilal Oswal Financial Services had observed an increase in incremental NBFC funding costs during the second quarter of FY27, particularly among lenders dependent on market borrowings.

This creates a problem for companies that have already committed to lending money at fixed rates. Their income from existing loans may remain unchanged even as the cost of obtaining new funds increases.

The pressure depends on how each NBFC finances its operations.

Why strong loan growth may not mean higher profits

Loan growth tells us how quickly a lender's business is expanding. It does not show how much profit the lender retains from each loan.

Consider an illustrative NBFC that earns an average annual lending yield of 16% and pays 9% to raise funds.

The difference is seven percentage points before accounting for credit losses, operating expenses and other factors.

If its funding cost rises to 9.5% while its lending yield remains unchanged, that difference falls to 6.5 percentage points.

These figures are hypothetical and are not actual reported rates for any NBFC. The calculation illustrates the effect of rising funding costs; it is not a formal net interest margin calculation.

A lender could still report higher total income if its loan portfolio expands sufficiently. However, weaker margins can reduce the profitability of each additional rupee lent.

That is why analysts are watching funding costs alongside disbursements and asset quality during the September-quarter earnings season.

NBFC loan growth could remain around 20–25% for some lenders

Despite the funding concerns, lending demand has remained supportive.

According to the October 19 Economic Times report, Nuvama expects several large retail and diversified NBFCs to maintain loan growth of approximately 20–25% in the near term.

The forecast applies to selected lenders rather than every NBFC in India.

Demand has been supported by activity across housing finance, vehicle loans, gold loans and unsecured lending.

Another factor is the availability of funding from banks.

The report cites JM Financial estimates showing that bank credit to NBFCs grew approximately 27% in FY26, compared with around 6% in the preceding financial year.

That additional funding can support lending expansion. However, the interest rates attached to new or repriced bank borrowings remain important.

An NBFC may have access to sufficient funds while still paying more to obtain them.

Will NBFC personal loan interest rates increase?

Borrowers should distinguish between an NBFC's cost of raising money and the interest rate charged on an individual loan.

There are several possible outcomes.

New personal loans: A lender facing higher funding costs may revise rates on future loans. The change could depend on borrower risk, loan tenure, competition and the lender's pricing policy.

Existing fixed-rate loans: An increase in the lender's funding cost generally does not change the contracted interest rate or EMI on a loan that remains fixed throughout its tenure.

Existing floating-rate loans: The rate may change according to the agreed benchmark, reset conditions and applicable loan terms.

Loan eligibility: Higher funding costs do not automatically mean tighter eligibility rules. A lender may separately review credit policies based on repayment performance and risk appetite.

For borrowers comparing lending options, Pocketly's guide to NBFC personal loans for bad credit explains why eligibility and credit assessment remain relevant even when lenders have sufficient funds.

What could happen to a ₹50,000 personal loan?

Suppose someone is considering a ₹50,000 personal loan with a nine-month repayment period.

The table below shows how different annual interest rates affect the monthly EMI under a hypothetical reducing-balance calculation.

Illustrative calculations; rounded amounts, excluding processing fees, taxes and other charges. These are not Pocketly's advertised rates.

A one-percentage-point increase in the annual rate does not mean the EMI rises by 1%. The actual change depends on the outstanding principal and repayment period.

Borrowers can estimate different repayment scenarios using Pocketly's personal loan EMI calculator.

For short-tenure loans, processing fees and other charges can also materially affect the annual percentage rate (APR). The interest rate alone is therefore insufficient for comparing borrowing costs.

Are all NBFCs facing the same pressure?

No. The impact depends on how a company raises money and the types of loans it provides.

An NBFC with substantial fixed-rate borrowing may be protected from immediate increases in market interest rates until those liabilities mature or require refinancing.

A lender whose borrowing costs reset frequently may experience the increase sooner.

The type of lending also matters.

For example, an NBFC providing floating-rate loans may be able to revise lending yields under its contractual terms. A company offering fixed-rate personal loans may have less flexibility to reprice its existing portfolio.

Credit quality is another consideration.

The September 23 Jefferies assessment, reported by ETBFSI, indicated that loan demand and asset quality were holding up across several NBFC segments. The report was based on discussions with nine lenders.

That finding provides context for the current earnings outlook. It does not guarantee that repayment performance will remain stable across the sector.

Borrowers interested in how lenders evaluate applications can read Pocketly's explanation of credit scores and their role in borrowing.

What does this mean for first-time personal loan borrowers?

Someone applying for their first personal loan may see little immediate change from the developments reported on October 19.

Lenders will continue to evaluate factors such as income, existing repayment obligations, credit history and the requested loan amount.

An applicant with no established credit score may still be assessed using other permitted information, depending on the lender.

A lender's ability to raise funds does not guarantee approval.

Before applying, borrowers should check the identity of the regulated lender, the APR, processing charges, repayment dates and total repayment obligation.

Pocketly's guide to personal loans for students without a job discusses some of the difficulties faced by applicants without regular income.

Borrowers should also understand how to identify potentially fraudulent loan apps before sharing personal or financial information.

How does the October outlook differ from September's NBFC funding expectations?

The latest report adds a useful development to the funding outlook discussed in September.

On September 29, Nuvama's assessment indicated that increased banking-system liquidity associated with foreign currency non-resident deposit mobilisation could help contain incremental NBFC funding costs.

By October 19, attention had turned to the effect of the RBI's rate increase and elevated bond yields.

These observations are not necessarily contradictory.

Higher banking liquidity can improve the availability of funds, while rising benchmark interest rates can increase their price.

In other words, an NBFC may find it easier to obtain funding but still have to pay a higher interest rate.

Pocketly previously covered the liquidity outlook in its report on five NBFC lending trends to watch in FY27.

The October development adds the risk that rising borrowing costs could gradually offset some of the benefits of stronger funding availability.

What should borrowers watch in the coming months?

The next important evidence will come from actual NBFC financial results and lending-rate disclosures.

Three indicators deserve attention:

• Cost of funds: Whether lenders report paying more for new borrowings or refinancing.

• Net interest margins: Whether higher funding expenses reduce lending profitability.

• Loan pricing: Whether lenders revise the rates or charges offered to new borrowers.

Borrowers should avoid assuming that an industry-wide earnings forecast will translate into a specific change to their EMI.

For more information about the RBI's October decision, read Pocketly's report on the RBI repo rate hike and its impact on personal loan EMIs.

What does this mean for Pocketly borrowers?

Pocketly provides digital access to personal loans of ₹1,000 to ₹50,000 through its lending partner, Speel Finance Company Private Limited, an RBI-registered NBFC.

The October 19 industry outlook does not establish any change to Pocketly's interest rates, processing fees or repayment conditions.

Borrowers should rely on the current loan offer and Key Facts Statement for applicable costs and repayment obligations.

They can also review Pocketly's instant personal loan information before starting an application.

The larger development is that India's NBFC sector continues to attract loan demand while lenders prepare for potentially higher financing costs.

Whether those costs reach individual borrowers will depend on lender-specific decisions and the terms of each loan.

Frequently asked questions

1. Why are NBFC funding costs rising in 2026?

Higher benchmark interest rates and elevated bond yields can increase the cost of new borrowings and refinancing. The effect varies with each NBFC's funding arrangements.

2. Will NBFC personal loans become more expensive after the RBI rate hike?

Some lenders may revise rates on new loans, but there is no automatic increase across all NBFC personal loans. Existing fixed-rate loans generally remain subject to their agreed rates.

3. Are NBFCs still growing in FY27?

Yes. Analysts expect continued growth across several lending segments. Nuvama forecasts near-term loan growth of approximately 20–25% for selected large retail and diversified NBFCs.

4. Can higher funding costs affect personal loan approval?

They may influence a lender's pricing or business decisions, but approval continues to depend on its eligibility requirements and credit assessment. Higher funding costs alone do not establish a change in approval criteria.

Sources

1. The Economic Times — 19 October 2026

NBFC stocks in focus: Rising funding costs threaten margins despite robust loan growth and asset quality

Main reporting source for the October 19 funding-cost outlook, Motilal Oswal observations, Nuvama growth forecasts and Choice Institutional Equities margin expectations.

2. ETBFSI / ANI — 23 September 2026

NBFCs see healthy loan demand, resilient asset quality; rate hikes may lift funding costs: Jefferies

Earlier brokerage assessment providing context for loan demand and credit quality.

3. Reserve Bank of India

Official RBI website

Official reference for monetary policy announcements and regulatory information.

This article reports industry developments and analyst expectations as of October 19, 2026. It does not indicate that any particular lender has increased its personal loan rates unless separately confirmed.