The easy-money post-COVID boom masked the difference between strong and weak lenders. But with India’s economic cycle now cooling, quality banks are pulling ahead again, argues Marcellus’s Saurabh Mukherjea.
“What happened in the first two years after COVID was like downhill racing. If you’re downhill racing, then a one-litre engine car and a Ferrari look the same,” he said on The Wealth Formula podcast with N Mahalakshmi. “And a lot of people laughed at me saying, look at this moron. He’s driving a Ferrari, four times price to book. And they were right.”
During that period, government capital expenditure and “revenge spending” fuelled broad-based growth, lifting earnings even for weaker lenders. Marcellus’s quality-focused portfolios lagged as a result. “For three years, we made no money on good lenders,” Mukherjea admitted.
But the cycle has shifted since late 2023. “When the party ends, and it’s an uphill slope now, the going is tough. The Ferrari pulls ahead of the one-litre engine,” he said. He likens this to the 2015–2018 period when a handful of quality lenders were re-rated while weaker peers traded at less than book value.
Mukherjea says this divergence is now visible again. “Our portfolio performance has returned. And thank God for that,” he said, noting that HDFC Bank and ICICI Bank remain key positions.
The distinction lies in underwriting quality and risk management. While smaller lenders relied on simple heuristics like “tech worker from Bangalore,” larger banks applied deeper layers of assessment, avoiding overexposure to households now facing repayment pressure. “If this cohort is looking risky, make sure that the interest rate reflects the risk. If that leads to balance transfer out, then so be it,” Mukherjea said.
Mukherjea said investors need to understand that quality may underperform when the economy is going gangbusters, but when the economic conditions get tough, they will make a comeback. “Those who can time the market like that, good for them. We unfortunately don’t have that skill,” he admitted. “Hence we suffered that underperformance. And then as the economy slowed in the last year and a bit, our portfolio performance has returned.”
As asset quality pressures mount in retail credit and smaller lenders face headwinds, the case for sticking with quality lenders — the “Ferraris” — will pay-off, Mukherjea said.
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