Large private sector banks are often praised for their steady deposit market share gains and increasing scale benefits, but niche lenders, such as Non-Bank Financial Companies (NBFCs) and Housing Finance Companies (HFCs), also offer compelling growth opportunities. According to a recent report expanding coverage of the Indian financial sector, a brokerage has initiated coverage on three stocks – Bajaj Finance, IndusInd Bank, and Muthoot Finance.
The brokerage highlights that niche lenders have been able to tap into segments with strong credit demand that traditional banks have not fully met. This has led to significant growth for NBFCs, with a 10-year loan CAGR of 14 percent compared to less than 10 percent for banks. Despite the decreasing regulatory arbitrage between NBFCs and banks, niche lenders focusing on mass market segments still have room for growth due to India’s low debt penetration.
Furthermore, niche lenders are seen as an effective way to capitalize on trends in the sector, such as the shift from consumption to investment cycles, a slowdown in consumption credit growth, and the start of a rate easing cycle. The brokerage believes that well-established niche lenders with innovative business models are well-positioned to navigate increased regulatory scrutiny while driving financial inclusion.
In terms of specific stocks, Bajaj Finance is lauded for its stellar earnings trajectory and execution in the consumer lending segment. While the company aims to maintain profitability and growth in the medium term, challenges lie ahead due to headwinds in the market. IndusInd Bank is viewed as a quasi-NBFC with exposure to attractive segments like commercial vehicles and microfinance, positioning it well for a potential rate easing cycle. Muthoot Finance, specializing in gold loans, is seen as a strong player in a unique segment fueled by Indian households’ love for gold as collateral.
Overall, the brokerage prefers niche lenders that cater to attractive segments through distinct operating models, offering investors opportunities for growth and returns in the evolving financial landscape.