2025 Reasons Small Finance Banks and NBFCs to Recover Strongly Post Rate Cut

Small finance banks and NBFCs to recover — this is the strong belief of Abhay Agarwal, founder of Piper Serica Advisors, following the Reserve Bank of India’s (RBI) latest interest rate cut. In his recent analysis, Agarwal emphasized that the reduction in policy rates is not just a number on paper. It’s a clear signal that the Indian economy is entering a phase of monetary easing that can positively transform lending institutions and related sectors.

This development is particularly important for small finance banks (SFBs) and non-banking financial companies (NBFCs) — institutions that have long been at the heart of India’s grassroots credit system. In addition, the real estate market, which has been cautiously waiting for a positive trigger, stands to gain significantly from this change.

Let’s take a deeper look at how and why small finance banks and NBFCs to recover, and why real estate could be the surprise winner in this financial shift.

What the Rate Cut Means for Small Finance Banks and NBFCs

A rate cut by the RBI means a reduction in the repo rate — the rate at which the RBI lends money to commercial banks. When this rate is reduced, it has a domino effect throughout the economy:

• Lending becomes cheaper.
• EMIs on loans reduce.
• Consumer spending increases.
• Businesses can borrow at lower costs.

For small finance banks and NBFCs, which rely heavily on market borrowing and interbank lending, this is a direct boost to their cost structures.

5 Reasons Why Small Finance Banks and NBFCs to Recover Now

1. Lower Cost of Borrowing = Better Margins

The single biggest advantage of a rate cut is the reduction in borrowing cost. Most NBFCs do not take direct deposits like banks. Instead, they raise funds from banks or capital markets. When the interest rate goes down, they can access funds at lower costs, improving their net interest margin (NIM) — a crucial profitability metric.

2. Improved Credit Demand from MSMEs and Consumers

NBFCs and SFBs serve micro, small, and medium enterprises (MSMEs), individuals, and first-time borrowers. When interest rates fall, it becomes more attractive for such borrowers to take loans — whether for expanding a small business, buying a vehicle, or purchasing a home. This increased credit demand will directly result in higher loan disbursements, supporting recovery.

3. Boost to Asset Quality

Over the past few years, many NBFCs and small banks have faced asset quality pressures due to defaults and delinquencies. With lower EMIs and better affordability, repayment rates are expected to improve, reducing NPAs (Non-Performing Assets) and improving financial health.

4. Increased Liquidity

The rate cut is usually accompanied by additional RBI measures such as CRR reductions, SLR changes, and targeted liquidity windows. This increases available liquidity in the system. With more liquidity, these institutions can lend more aggressively, expand their footprint, and tap into new markets.

5. Greater Confidence Among Investors

A recovering financial sector backed by RBI support often attracts both domestic and foreign institutional investors. For listed NBFCs and SFBs, this could result in better stock performance, easier access to capital, and improved investor confidence in the long run.

Why Realty Sector to Benefit from NBFC and SFB Recovery

The real estate market, especially the residential segment, has seen muted demand in the past few years. High home loan rates, project delays, and economic uncertainty led to cautious buyer behavior. However, the RBI’s recent move has started changing that narrative.

Lower EMIs, Higher Affordability

Lower repo rates translate to reduced interest rates on home loans. For middle-income families, even a 0.5% reduction in interest rates can reduce EMIs significantly over 20 years. This boosts affordability, encouraging people to buy homes or upgrade existing ones.

Revival in Housing Demand

Abhay Agarwal notes that with NBFCs recovering, home loan NBFCs like HDFC and PNB Housing can also benefit. More loans can be disbursed, improving liquidity for developers and making housing finance accessible.

Commercial Real Estate and Office Spaces

NBFCs and banks finance not only residential but also commercial properties, including co-working spaces, retail outlets, and offices. With credit becoming cheaper, builders can resume stalled projects, and businesses can expand office space, driving commercial real estate growth.

Abhay Agarwal’s View on Timing and Market Sentiment

Abhay Agarwal believes that this rate cut could be the beginning of a longer cycle of monetary easing. If inflation remains under control, more rate cuts could follow. This would result in a long-term supportive environment for credit growth, business expansion, and real estate demand.

He cautions, however, that the recovery will not be automatic. Several factors must align:

• Macro-economic stability
• Controlled inflation
• Policy execution by the government
• Revival in job creation

Yet, with India’s growth rate improving and RBI signaling its intent to support the economy, the broader direction remains positive.

What This Means for Investors and Stakeholders

For investors, this is a strategic opportunity. Financial stocks, especially NBFCs with strong fundamentals and exposure to high-demand segments like housing or vehicle loans, are likely to perform well. Real estate developers, especially those in affordable and mid-income segments, are also likely to benefit from revived demand and better financing conditions.

Real estate buyers should view this as a window of opportunity, with interest rates possibly at the lowest in years. Those planning to purchase homes, especially through NBFC-financed schemes, may find this the most affordable time to do so.

Conclusion

The RBI’s rate cut is not just a relief for borrowers — it’s a lifeline for lenders, especially small finance banks and NBFCs. According to Abhay Agarwal, this move could trigger a recovery cycle across finance and real estate sectors. With better liquidity, improved credit flow, and positive market sentiment, small finance banks and NBFCs to recover strongly in the coming quarters.

As lending picks up and housing demand revives, India could be entering a new phase of inclusive financial growth, where underserved borrowers and regional markets finally get the credit and infrastructure support they’ve long needed.

Also Read – 5 Reasons Bengaluru Real Estate Luxury Villa Rentals Surge Now