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Summary: Rising stress in unsecured loans has put the spotlight on India’s financial sector. But instead of running away, many mutual funds still maintain their exposure to Financials. So, why have fund managers remained invested in this space? Two fund managers explain their stance.
India’s financial sector finds itself under pressure due to rising stress in unsecured lending, particularly in personal loans, credit cards and MSME financing. As a result, the Reserve Bank of India (RBI) has flagged concerns, and rating agencies, too, have warned of emerging risks.
Yet, mutual funds are showing no signs of retreat, particularly flexi-cap and focused funds, for they continue to bet heavily on Financials.
‘No stress at a systemic level’
Schemes such as DSP Flexi Cap, Bandhan Focused, HDFC Focused and HDFC Flexi Cap continue to maintain allocations in them in the range of 35-38 per cent, well above the Nifty 500 TRI’s 28.28 per cent.
This conviction suggests that fund managers remain confident in the sector’s structural strength, even if near-term headwinds persist.
“There is stress in pockets, but not at a systemic level,” said Bhavin Gandhi, fund manager of DSP Flexi Cap Fund, which has 38.6 per cent exposure to Financials. “(Although) one of the leading NBFCs (Non-banking financial companies) highlighted MSME stress and another private bank flagged issues, partly due to a one-off provisioning impact, HDFC Bank has shown no visible signs and ICICI Bank indicated unsecured retail originations would pick up. Which means, each bank’s exposure to stressed pockets is different.”
Incidentally, S&P Global Ratings recently flagged the rapid rise of small-ticket unsecured personal loans, credit cards, commercial vehicle loans and microfinance lending. But some fund managers don’t see this as a warning sign. Instead, they view the recent dip in financial stocks as a possible buying opportunity.
“High-frequency data doesn’t show any worsening stress. We’re tracking it closely, but right now, there’s no sign of a credit cycle building,” Gandhi said.
Kirthi Jain, Vice President – Equity at Bandhan AMC, also downplayed the unsecured lending stress, saying, “It has already been curtailed over the last three quarters, and we believe the sector is now nearing the peak of stress in this segment. We are selectively investing in pockets of stocks with strong provision coverage ratios.”
Valuations, too, are creating opportunities, with some lenders trading at a discount to their long-term averages. This is what is allowing fund managers to selectively accumulate quality names.
“Strong balance sheets, net interest margins likely bottoming out in a quarter and attractive valuations together make us constructive on Financials,” said Bandhan AMC’s Jain.
Also read: IT mid caps still offer good opportunities: Kotak Mahindra AMC's Atul Bhole
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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