While NBFCs are likely to feel the heat from banks, some of them who are dependent on the bond market to fund are more vulnerable, says Credit Suisse in a report.

The rates for those bank dependent ones, like L&T Finance, would ease helping their profitability; the likes of LIC Housing Finance may see a hit on their profitability.

In a report on identifying vulnerable exposures to PSU re-entry, Credit Suisse said that the risk from the PSU banks' recap comes from potential lending rate aggression. Public sector banks have traditionally been strong in the home loan market.

Funding costs will come down for NBFCs with a high share of term loans and those with heavy bond funding. With the banks flush with liquidity post-demonetisation, NBFCs have seen huge reduction in cost of funds, leading to competitive pricing of loans.

Gross bad loans of NBFCs was down to 4.4 per cent in March 2017, from 4.9 per cent in September 2016 and March 2017 when banks in general witnessed a rise.

The report said that LIC Housing Finance could be the most vulnerable to the PSU recap.

Others like Shriram Transport, Mahindra and Mahindra Finance and Shriram City Union have reasonable pricing power and could stand to benefit in the long-term from this economic stimulus are positioned as top picks in the NBFC space, the report said.

"LIC Housing Fin comes out as the most vulnerable to the PSU recap and we downgrade the stock to 'neutral'," the report said.

"The re-entry of PSU banks could hurt one important subsegment--salaried home loans," said the report.