NBFCs poised to outperform banks in easing rate cycle amid deposit growth challenges
Market expert Sandip Sabharwal highlighted significant deposit growth challenges facing banks due to foreign institutional investor outflows and trade deficits, with particular skepticism about HDFC Bank's ability to achieve both growth and loan-to-deposit ratio targets. He expressed optimism about NBFCs, citing their controlled asset quality and historical outperformance during monetary easing cycles, with L&T Finance, Mahindra Finance, and Manappuram Finance as preferred options. The QSR sector's recent consolidation reflects weak consumer demand over the past 2-3 years rather than strategic growth, with the Devyani-Sapphire merger exemplifying balance sheet stress across the segment.
*this image is generated using AI for illustrative purposes only.
Market expert Sandip Sabharwal outlined the evolving dynamics across India's financial services sector during a comprehensive discussion on ET Now, highlighting significant challenges for banks while expressing optimism about non-banking financial companies (NBFCs) in the current monetary environment. The conversation covered deposit growth pressures, liquidity constraints, and sectoral consolidation trends affecting the broader financial ecosystem.
Banking Sector Faces Deposit Growth Headwinds
The banking sector is grappling with substantial deposit mobilisation challenges that extend across both private and public sector lenders. Sabharwal identified persistent foreign institutional investor outflows and trade deficits as primary drivers of systemic liquidity pressures, noting that even Reserve Bank of India measures are being neutralised by these external factors.
Specific concerns emerged around major private lenders' loan-to-deposit ratio management:
| Bank Focus Areas: | Key Challenges |
|---|---|
| HDFC Bank: | LDR target of 85-90% appears unrealistic with current deposit growth |
| ICICI Bank: | Balancing loan growth with deposit mobilisation |
| Punjab National Bank: | Struggling to attract deposits despite strong loan growth |
Sabharwal expressed particular skepticism about HDFC Bank's dual objectives, suggesting that achieving both above-market growth and bringing loan-to-deposit ratios down to the guided 85-90 percent range appears unrealistic. He predicted that one of these targets would likely be missed. Additionally, he noted that PSU banks could face greater challenges compared to private sector banks, as younger customers increasingly prefer private lenders.
NBFCs Positioned for Outperformance
Despite banking sector challenges, Sabharwal maintained a positive outlook on NBFCs for their prospects in the current environment. He highlighted several factors supporting the NBFC sector's attractiveness, particularly their historical performance during periods of monetary easing.
Key NBFC sector advantages include:
- Controlled non-performing asset accretion across most companies
- Historical tendency to outperform banks during easing interest rate cycles
- Better positioning during benign monetary policy environments
Among his preferred investment options, Sabharwal specifically mentioned:
| Company: | Investment Rationale |
|---|---|
| L&T Finance: | Attractive NBFC exposure |
| Mahindra Finance: | Strong sectoral positioning |
| Manappuram Finance: | Potential turnaround candidate |
He clarified that these represent examples within a broader universe of NBFCs that could perform well in the current environment.
QSR Sector Consolidation Reflects Demand Weakness
The quick service restaurant sector's recent consolidation activity reflects underlying consumer demand challenges rather than strategic growth initiatives. Sabharwal explained that the QSR space, once viewed as a high-growth segment, has experienced subdued consumer demand over the past two to three years, resulting in slow growth across most formats.
This demand weakness has created significant operational pressures:
- Balance sheet stress across QSR companies
- Difficulty achieving standalone profitability
- Progressive stake sales at lower valuations
The Devyani-Sapphire merger exemplifies these challenges, as companies struggled to achieve profitability independently. Sabharwal noted that recent private equity exits reflect multiple factors, including fund lifecycle considerations, making it difficult to draw definitive conclusions about sector prospects.
Market Outlook and Consumer Demand Recovery
Sabharwal observed that expected consumer demand revival has lagged despite supportive policy measures including income tax relief, GST cuts, and accommodative monetary policy. He attributed this delay partly to lingering effects of high inflation from previous years continuing to weigh on consumer sentiment.
Regarding QSR sector consolidation, he clarified that recent developments largely represent investor exits rather than operational consolidation, with companies continuing to operate as before. Any potential new strategic investments, including from family offices with QSR exposure, would likely be relatively small compared to overall company sizes, with impact depending on buyer strategy and execution.
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