Aavas expects spreads above 5% after RBI rate increase

Aavas Financiers Limited expects to keep lending spreads above 5% despite a 25-basis-point Reserve Bank of India rate increase. Aavas had not raised its prime lending rate, or PLR, at the time of the call, but management cited transaction-level pricing, funding management and a 7.81% Q2FY27 net interest margin as support for its position.

Will Aavas keep lending spreads above 5%?

Aavas said it expects lending spreads to remain above 5%, including through the expected increase in borrowing costs after the 25-basis-point repo-rate rise. Management rejected an analyst's concern that spreads could fall below 5% in Q3FY27 before a PLR adjustment, saying the company monitors both borrowing costs and lending prices through its Asset Liability Management Committee, or ALCO.

The 5% threshold applies to disbursements being placed under Aavas's transaction-level pricing process. Management said incremental spreads were “almost same” as the existing book at the time of the call, rather than already above book spreads. The company expects a rising-rate environment to allow a gradual reversal through pricing on individual transactions, instead of an immediate repricing across its entire loan book.

Aavas reported that its cost of borrowing was stable at 7.64% during the quarter, before the RBI's rate increase. In Q2FY27, its cost of funds improved by 21 basis points, or bps, year on year, while net interest margin, or NIM, increased 11 bps quarter on quarter to 7.81%. NIM measures net interest income as a proportion of assets, while lending spread reflects the difference between lending yield and funding cost.

Has Aavas raised its PLR after the RBI rate increase?

Aavas had not raised its PLR after the RBI rate increase, and management said it was examining the need for a change. ALCO meets monthly and uses a formula-driven approach to calculate PLR, according to management. Any increase would therefore follow this internal review rather than happen automatically after the 25-bps repo move.

The timing matters because around 30% of Aavas's borrowings are linked to the repo rate. The remaining borrowings are tied to benchmarks including the marginal cost of funds-based lending rate, or MCLR, and fixed-rate instruments. Management acknowledged that repo-linked liabilities can reprice, but said it did not expect this to push the spread below 5% during Q3FY27.

Aavas raised about Rs 1,679 crore in Q2FY27 at a 7.66% rate and had Rs 21,600 crore of outstanding borrowings as of September 30, 2026. It also had Rs 1,960 crore of liquidity, including cash, cash equivalents and unavailed cash-credit limits, plus Rs 300 crore of documented unavailed sanctions. Management said the average tenure of borrowings exceeded the average tenure of assets, resulting in positive asset-liability management across all time buckets.

How will Aavas protect spreads on new loans?

Aavas plans to protect spreads through risk-adjusted, transaction-level lending prices that reflect geography, branch performance, product, sourcing cost and customer credit characteristics. Management said its Salesforce platform and business rule engines generate pricing ranges for each case, allowing a discount or an increase where warranted. These rules are reviewed twice a month to keep pricing aligned with funding costs.

For home loans, management said recent incremental-yield movement was roughly 8 to 10 bps. It also said home loans remain a competitive segment and that Aavas would not force higher pricing only to offset funding costs. Instead, the pricing process distinguishes among home loans, loan against property, or LAP, and micro, small and medium enterprise, or MSME, products, as well as the economics of individual sourcing channels.

The lending mix is another part of the margin plan. Aavas targets a steady-state assets-under-management, or AUM, mix of 65% home loans and 35% non-home loans. LAP accounted for around 21% of H1FY27 disbursements but about 14% of AUM, partly because the company accelerated top-up loans to existing customers. Management said top-ups represented roughly 5% of total disbursements, are classified as LAP and carry near-zero acquisition cost.

What do Aavas's reported margins and profits show?

Aavas reported a NIM of 7.76% for H1FY27, down 5 bps year on year after earlier PLR cuts, despite a 21-bps improvement in borrowing cost. The Q2FY27 NIM of 7.81% was 5 bps above the H1FY27 level. Management said higher lending rates on incremental disbursements should progressively raise AUM yield and support both spreads and NIM in coming quarters.

Net interest income rose 17% year on year in H1FY27 and net profit increased 16.4% to Rs 350 crore. In Q2FY27, net interest income grew 15% year on year, while pre-provision operating profit rose 14% to Rs 249 crore and profit after tax grew 10.7%. The cost-to-income ratio declined 195 bps year on year to 42.9% in H1FY27 and was also 153 bps lower quarter on quarter at 42.9% in Q2FY27.

Aavas reported return on assets of 3.28% and return on equity of 13.63% in Q2FY27, increases of 9 bps and 28 bps quarter on quarter, respectively. Its net worth stood at Rs 5,400 crore and its capital-to-risk-weighted-assets ratio was 43.77%. These figures set the financial backdrop for management's spread plan, though its stated outcome depends on funding costs, PLR decisions and transaction-level loan pricing.

Can Aavas grow while preserving its spread target?

Aavas said its commitment to disbursement growth above 20% remained unchanged, with Q3FY27 festive demand and Q4FY27 seasonality expected to support the trajectory. H1FY27 disbursements rose 30% year on year to Rs 3,510 crore, while AUM increased 16.1% to Rs 24,800 crore as of September 2026. Management also reaffirmed its FY27 AUM-growth guidance of 16% to 17%.

The company plans to pursue this growth through branch expansion and relationship-officer productivity rather than relaxed underwriting. Aavas operated 443 branches across 15 states in Q2FY27 and added more than 21,500 customers in H1FY27. Relationship-officer productivity increased from 1.1 files per month in Q1FY27 to 1.2 in Q2FY27 and 1.3 in September, against management's FY27 target of 1.5 files.

Management's medium-term volume framework assigns roughly 8% growth to branches, 10% to productivity and 5% to 7% to average ticket size. Aavas is also investing in digital and alternate sourcing channels while retaining its direct-sales model. Management's medium-term operating targets are operating expenses to assets below 3% and a cost-to-income ratio below 40%, compared with 42.9% in H1FY27.

Conclusion

Aavas's position is that the RBI's 25-bps rate increase will not take its lending spread below 5%, despite no immediate PLR increase. The company is relying on monthly ALCO oversight, diversified liabilities, pricing by transaction and product, and higher yields on new lending. Its 7.81% Q2FY27 NIM and 21-bps year-on-year improvement in funding cost provide the reported context for that expectation.

The next points to watch are whether ALCO raises PLR as repo-linked borrowings reprice and whether the cited 8-to-10-bps movement in incremental home-loan yields continues. Management has also disclosed execution markers for FY27 and the medium term: disbursement growth above 20%, AUM growth of 16% to 17%, 1.5 monthly files per relationship officer and a cost-to-income ratio below 40%.