DSP Mutual Fund: Banks With Strong Deposit Franchises Win Over NBFCs in India's Financialisation Wave

The Quick Take

• DSP Mutual Fund's Preethi R S is constructive on India's financial sector, favoring banks with strong deposit franchises and disciplined underwriting over NBFCs
• She sees healthy retail and SME credit demand, early signs of corporate lending recovery, and opportunities across banks, NBFCs, and non-lending financials
• India's long-term 'financialisation' — the gradual deepening of formal financial services penetration across the population — is the structural thesis
• The preference for deposit franchise strength reflects concerns about NBFC funding cost vulnerability as interest rates remain elevated

DSP Mutual Fund portfolio manager Preethi R S presents a differentiated view on India's financial sector that goes beyond the standard 'overweight financials' call. Her preference for banks with strong deposit franchises — over NBFCs — reflects a specific risk assessment: in an environment where interest rates remain elevated, funding costs matter enormously. Banks with strong retail deposit bases have a structural cost of funds advantage over NBFCs that depend on wholesale funding markets, where margins are thin and refinancing risk is material. The deposit franchise quality thesis has become more critical as the RBI's extended rate cycle has exposed NBFC funding model vulnerabilities.

The credit demand picture she describes is encouraging at multiple levels. Retail credit — home loans, auto finance, personal loans — remains healthy, reflecting the sustained wage growth and employment stability in India's services sector. SME credit demand signals that small business confidence has not been materially impaired by the global macro uncertainty, which is a positive for the economic cycle. The early signs of corporate lending recovery are perhaps the most significant signal — corporate capex borrowing historically leads broader economic expansion and has lagged consumer credit in this cycle.

India's financialisation thesis — the structural deepening of formal financial services across a population where large segments are still underserved — is the long-duration investment case underlying Preethi's constructive view. The penetration of banking, insurance, mutual funds, and digital payments into India's rural and semi-urban population has decades of runway. For investors choosing between banks, NBFCs, and non-lending financials (insurance, AMCs), the framework of deposit franchise quality in banking and claim settlement reputation in insurance will increasingly determine which specific names benefit most from the financialisation wave.

Synthesized from 1 source.