This NBFC Just Had a Quarter That Answered the Market’s Biggest Question About the Stock

Credit quality improving across every segment, gold loans scaling fast, and AI transforming loan processing 

For the better part of the last eighteen months, the central debate around Bajaj Finance has not been about growth — it has been about credit quality. Whether the stress in certain pockets of the consumer lending book was transient or structural was the question that kept a lid on the stock even as the business kept expanding.

The fourth quarter of FY26 did not fully close that debate, but it moved it decisively in one direction. Asset quality improved across every segment, vintage credit performance is now tracking below FY20 levels, and management’s credit cost guidance for FY27 is being treated by Nirmal Bang as credible rather than aspirational. The brokerage maintains BUY with a revised target of Rs 1,100, implying 18% upside from the current market price of Rs 930.

The Credit Quality Story

Loan loss to average assets under finance improved to 1.75% from 1.97% in the same quarter last year. Stage 2 and stage 3 assets declined sequentially. Provision coverage strengthened to 60% from 54%. And crucially, vintage credit performance across multiple time buckets is now tracking below FY20 levels — a pre-pandemic baseline that the market has long used as a benchmark for normalised credit behaviour.

As per the brokerage, the management’s FY27 credit cost guidance of 1.45-1.60% “appears credible.” The captive two-wheeler and three-wheeler financing book — which has been the primary source of elevated stress — is expected to fully unwind by September 2026. MSME disbursements are already being recalibrated at the micro level. The self-inflicted pain of the last few quarters, in other words, has a visible end date.

Record AUM

Bajaj Finance added Rs 255 billion of AUM in a single quarter — a record — taking the total to Rs 5.1 trillion, up 22% year-on-year. NII grew 20% year-on-year to Rs 118 billion. Before one-time items, PBT grew 26% and PAT grew 27% — both ahead of AUM growth, which Nirmal Bang flags as evidence of “meaningful operating leverage at scale.”

The standout within the portfolio is gold loans — a business that barely existed for Bajaj Finance until recently. Gold loan AUM has grown 115% year-on-year to approximately Rs 180 billion, now operating from 1,507 branches. Management is targeting gold loans reaching 5% of total AUM by FY27, up from 3.5% currently. For a franchise built on consumer durables and personal loans, this is a meaningful diversification into a segment with strong collateral backing and attractive yields.

Cost of funds improved 43 basis points for the full year to 7.54%. The deposit book stood at Rs 685 billion — 16% of consolidated borrowings — providing what Nirmal Bang describes as “a stable, cost-effective funding base.”

FinAI Is Not a Buzzword Here

The artificial intelligence buildout at Bajaj Finance deserves more attention than it typically receives. Twenty-seven autonomous AI agents are currently live across the business. AI-enabled loan processing capacity has scaled to 600,000 loans per day at peak — up from 100,000 previously. The company has 203 dedicated AI personnel in place, expanding to 363 by June 2027. The guided improvement in opex-to-NTI ratio of 25-40 basis points for FY27 is expected to be supported in part by FinAI cost benefits flowing through — and is consistent with the 36 basis point improvement actually delivered in FY26.

The concerns

The note is candid about the points of concern, and it is worth being equally candid here. FY26 AUM growth of 22% came in below the guided corridor of 25%, primarily because of the deliberate pullback in MSME and the wind-down of the two-wheeler book. The FY27 guidance of 24% AUM growth offers limited acceleration despite several tailwinds — MSME recovering, the 2W/3W drag diminishing, and April 2026 already tracking record loan volumes. Gross NPA ticked up to 1.01% from 0.96% a year ago and is likely to remain elevated until the two-wheeler portfolio fully resolves. NIM faces some moderation in FY27 depending on interest rate dynamics. And management declined to disclose AI-related capital expenditure, making it difficult to independently assess the return profile of the FinAI programme.

Nirmal Bang values the stock using a residual income framework, arriving at Rs 1,100 — a modest upgrade from the previous target of Rs 1,090. The FY27 PAT growth estimate of 42.7% is the number that anchors the bull case, driven by credit cost normalisation, operating leverage from FinAI, and a recovering loan growth trajectory.

Bajaj Finance is one of those businesses where the short-term noise and the long-term signal point in very different directions. The noise — AUM growth below guidance, elevated gross NPAs, undisclosed AI capex — is real and worth watching. The signal — best-in-class credit infrastructure, a gold loan franchise scaling rapidly, AI-driven efficiency gains, and credit quality now tracking pre-pandemic levels — is what Nirmal Bang is asking investors to focus on. At 18% upside to target and with credit cost normalisation now visible on the horizon, the risk-reward is beginning to look more interesting than it has in several quarters.