'Banking growth may rebound from FY27'

Summary: Nippon India’s senior fund manager unpacks what’s driving the strong rally in banking and financial stocks, why the sector may look even better by FY27 and what retail investors should watch when picking lenders. From NBFCs and microfinance to PSU banks and small finance players—this is your sector roadmap. Vinay Sharma has spent around two decades navigating the cycles of the Indian markets. Today, as a senior fund manager, he manages about Rs 18,500 crore worth of assets across three equity schemes at Nippon India Mutual Fund. Among them is the Nippon India Banking & Financial Services Fund, rated five stars by Value Research. With banking and finance indices leading the market over the past year, Sharma’s lens on the sector carries weight. In this conversation, he explains why margin pressures are easing, how credit growth could shape up by FY27 and what retail investors should watch out for when eyeing financial businesses. The BSE Finance and BSE Bankex indices have been standout performers over the past trailing year. What’s been the key to their resilience? A few quarters back, many sectors in India were growing at a much faster clip than credit growth, and therefore, BSE Finance was lagging in terms of topline potential. That gap has now narrowed sharply, which may be one of the reasons why these stocks and the sector as a whole have performed quite well. Another reason is that the market is starting to believe, and this is something we are also beginning to factor into our investment thesis, that the worst of margin pressure and growth deceleration in the financial sector may be behind us by FY26. If the second half of this year sees a revival in economic growth, then by FY27, credit growth could be much higher and sector profitability could also look better, with margin concerns largely behind us. Importantly, we don’t currently see a major credit quality issue in India. Most asset classes have performed well, and most industries and corporate segments are healthy, with balance sheets remaining strong. So, FY27 could be a culmination of decent revenue growth, improved profitability compared to FY26 and continued strong asset quality. I think that anticipation is one of the reasons financial sector stocks have done well. In a recent report, CRISIL said NBFC credit growth could far outpace that of banks in the coming years. What do you consider the primary drivers behind this, and does this rapid growth come with any hidden risks? I’m not fu