Mumbai: Non-banking finance companies (NBFCs) reported a strong quarter of operating performance with net profit rising 25-30 per cent in the three months to September, driven by robust loan book growth and steady asset quality despite headwinds in the shape of floods in Kerala and an across-the-board increase in interest rates.Yet, the next half of the financial year is expected to be challenging. Industry expects growth to slow down in the third quarter given the liquidity squeeze following the default by IL&FS. Margins are likely to be crimped as cost of funds goes up.Funding is expected to become expensive for companies dependent on the debt market, with relatively shorter duration financing sources. Also, companies are likely to focus on less risky asset classes and conserving liquidity.In the second quarter, Mahindra Finance said its net profit more than doubled, aided by improvement in asset quality. L&T Finance reported a 66 per cent increase in net profit due to higher interest margins and growth in retail book. There has been a contagion effect of IL&FS and mutual funds are assessing the balance sheets of NBFCs closely before they start lending again. “Within NBFCs, well-run business models with stronger balance sheets, and prudent risk management practices will emerge stronger,” Edelweiss said in a recent report. Bajaj Finance reported a 54 per cent increase in net profit in the second quarter, with assets under management growing 38 per cent. The company focused mostly on shorter tenor loans , and is looking to cut longer-tenor commitments.“We have had a very conservative and robust approach to liquidity,” said S Sreenivasan, chief financial officer at Bajaj Finserv, the holding company for Bajaj Finance. “We may slow down the long tenor loans that are a smaller proportion at the NBFCs. We had raised Rs 20,000 crore in 2017-18. We maintain a (strong) cash position in the company.”On an incremental basis, most NBFCs have seen the cost of borrowing increase by 20 basis points to 100 bps from the last quarter. Companies have passed on the increase in costs.“Our internal understating is that the company will continue to grow 20 per cent, while we have grown in the last two years a tad faster - 30 per cent- plus - on the loan book side,” said Ashwini Hooda, deputy managing director, Indiabulls Housing Finance.