Large private banks, PSUs, NBFCs or MFIs: Which lender to bet on?

Smaller banks and niche NBFCs have higher exposure to these risky segments, and Sridhar Sivaram has sought tighter regulatory oversight.

Large private banks may not deliver substantial earnings growth, but they offer relative safety in the current market environment, Sridhar Sivaram, Investment Director at Enam Holdings said on May 19.

In conversation with Moneycontrol’s N Mahalakshmi on The Wealth Formula podcast, Sivaram said he expects banks’ profit growth to moderate to 12-15% annually, but the downside risk is limited since banking shares have underperformed in recent years and are less exposed to high-risk lending segments.

“These are the kind of stocks that didn’t deliver for five years. But now, even if they don’t get re-rated, they could still deliver 12-15% earnings growth. The downside is low, and they didn’t really participate in the recent rally,” Sivaram said, adding, “If they get operating efficiency, they can show slightly higher profit growth than loan growth.”

Read More: 'Average to disappointing' earnings makes us cautious, says Enam's Sridhar Sivaram

In contrast, Sivaram is bearish-to-cautious on microfinance institutions (MFIs) and smaller NBFCs due to their aggressive and reckless lending practices. He observed that the microfinance segment is struggling with poor customer growth and overlapping loans. “When you have already given five or six loans to a lady, why would you go and give more to the same lady?” he questioned, adding that total non-MFI loans taken by the same borrower base now stand at Rs 1 lakh crore, which is a worrying sign.

Read More: Not the time to be a hero, stay cautious with your capital, advises Enam's Sridhar Sivaram

“The segment isn’t getting new customers,” said Sivaram, which is a red flag, as the customer growth was only 3-4% while loan growth was significantly higher. He warned that this over-lending - particularly in the unsecured space - will take time to clean up.

Smaller banks and niche NBFCs have higher exposure to these risky segments, and he sought tighter regulatory oversight. “Even if these lenders stop, their NIMs will come down. That’s why I’m very careful with smaller NBFCs. The larger ones look far better,” said Sivaram.

The veteran investor said he prefers large private banks for their more conservative loan books and better risk management, although he tempered return expectations. “Banks that were growing profits at 20% a few years ago are now expected to do 15%. But even with that, they can offer reasonable returns.”

On the macro side, Sivaram said he sees supportive conditions for the financial sector. With inflation surprising on the downside and liquidity concerns easing, Sivaram expects the RBI to cut rates by 50 basis points in the upcoming policy, potentially boosting credit demand. “Even if food inflation ticks up, base effects will likely keep inflation under 4% for the next few months,” said Sivaram.

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