BFSI in 2025: PSU banks shine, MFIs struggle, gold financiers glitter

PSU banks outperform while microfinance face pressure this year

2025 was a year of clear winners and quiet stress for India’s BFSI sector. Public sector banks stood out as consistent outperformers, riding on cleaner balance sheets and steady loan growth, while pockets of stress lingered in microfinance. Gold financiers benefited from rally in gold prices but insurance stocks delivered a mixed showing, weighed down by margin pressure following the loss of input tax credits. Together, these trends summed up a year marked by divergence instead of broad-based gains.

Banks: Public sector takes the lead

Banking stocks offered one of the clearer narratives of 2025. Public sector banks outperformed most of their private peers, helped by improving asset quality and steady credit growth. Shares of Canara Bank rose nearly 50 percent during the year, while Bank of India gained about 40 percent. State Bank of India ended the year up over 22 percent, reinforcing renewed investor confidence in PSU lenders.

Among private banks, performance was mixed. AU Small Finance Bank emerged as a standout, climbing over 75 percent, while RBL Bank surged nearly 92 percent. In contrast, stocks such as Bandhan Bank and IndusInd Bank remained under pressure, reflecting concerns around profitability and growth visibility.

According to CareEdge Ratings, banking credit growth is expected to settle at 11.5–12.5 percent in FY26, driven mainly by retail and MSME lending. Analysts noted that while deposit growth continues to trail loans, margins are likely to be under pressure following RBI's recent cuts.

NBFCs: leaders and laggards

The NBFC universe told a more fragmented story. Large, well-capitalised lenders rewarded investors, while smaller and weaker players struggled. L&T Finance surged over 120 percent during the year, Bajaj Finance rose nearly 48 percent and Shriram Finance gained more than 60 percent. Mahindra & Mahindra Financial Services and Manappuram Finance also posted gains of over 50 percent.

At the same time, several NBFC stocks saw steep declines, particularly those exposed to unsecured and small-ticket lending. CareEdge highlighted that while aggregate asset quality has improved, stress persists in microfinance and lower-ticket MSME loans. MFI growth is expected to remain muted in FY26 after contracting sharply in FY25.

Axis Securities believes NBFCs are well placed for a rebound, with AUM growth of around 21 percent CAGR expected over FY26–28, aided by lower cost of funds, normalising credit costs and improving demand across vehicle finance, gold loans and diversified retail products.

Financial services and wealth plays

Diversified financials and wealth managers emerged as quiet winners. Anand Rathi Wealth gained over 52 percent, while companies such as Choice International and Multi Commodity Exchange posted strong gains. Asset managers saw a mixed year, with HDFC AMC rising nearly 27 percent, while some peers lagged due to market consolidation and lower equity inflows.

Analysts noted that financialisation remains a structural theme, with SIP flows, retirement savings and wealth management continuing to expand, even during periods of market volatility.

Insurance: Regulation weighs, growth endures

Insurance stocks faced a more complex set of challenges in 2025. The GST exemption on life and health insurance boosted affordability and demand, helping stocks like SBI Life and HDFC Life gain up to 11 percent post-announcement. However, the loss of input tax credits dented profitability. Emkay estimated that value-of-new-business margins were hit by 180–450 basis points, delaying stock re-rating.

Life insurers responded by tweaking product mixes, adjusting pricing and cutting costs. While this should help margins recover over time, near-term sentiment remained cautious.

The road ahead

Despite a year of uneven stock performance, analysts remain constructive on the BFSI sector’s outlook. CareEdge expects stable asset quality, easing funding costs and improving profitability across banks and NBFCs in FY26. Axis Securities believes earnings downgrades are behind the sector, with credit growth, margins and return ratios set to improve through H2FY26 and FY27.