UBS upgraded Bajaj Finance to Neutral from Sell and L&T Finance to Buy from Neutral on Wednesday, arguing that non-bank lenders are better positioned than banks as India’s unsecured credit cycle turns. The brokerage set a Rs 1,110 target on Bajaj Finance, implying 9% upside from the Rs 1,025 close, and a Rs 380 target on L&T Finance, roughly 25% above its Rs 313 finish. Both stocks rose 3% in the session.

The upgrades rest on asset quality and mix shift

UBS said Bajaj Finance has cleared asset-quality problems across its unsecured book and that a higher provision coverage ratio now buffers against macro shocks. For L&T Finance, the brokerage pointed to a steady climb in return on assets over recent quarters, driven by strong growth in personal loans and gold loans alongside a recovery in microfinance after earlier stress. The loan mix has tilted decisively toward higher-yielding segments, putting ROA on a path toward 3%.

A credit cycle argument, not a rate bet

The brokerage expects India to enter a strong unsecured growth phase led by personal loans, citing healthy asset quality across the system, flat household unsecured leverage for three years, ample liquidity and a more risk-on stance from lenders. Unsecured leverage sits at 10% of GDP, up from 6% in FY19 but stable since FY24. Gold loans have swollen from 1% to roughly 5% of GDP by FY26, though UBS sees that growth moderating as gold prices flatten, a shift that would favor franchises with deep personal-loan engines.

Liquidity surplus caps funding-cost risk

FCNR inflows of Rs 12-13 trillion are likely to leave the system awash in cash, since credit demand of Rs 45-50 trillion cannot absorb the full pool near term. Domestic savings flows remain stable. UBS factors in only a 15-20 basis point rise in FY27 funding costs, arguing that most NBFCs already trade below their one-year average valuations and that rate-hike fears are overdone.

The data is starting to cooperate

CRIF numbers for August showed personal loan growth hitting a two-year high, roughly 30% for NBFCs and 9% for banks. After a three-year cycle, asset quality across unsecured segments sits at its best level in quarters, though low-ticket business loans at NBFCs still show residual strain.