As foreign institutional investors (FIIs) recalibrate their emerging market strategies, India's banking sector is emerging as the primary destination for incoming capital. While speaking to NDTV Profit in an exclusive interview on June 11, Pranav Gundlapalle, Senior Research Analyst at Bernstein, highlighted that while Indian banks have borne the brunt of the latest foreign capital outflows, they are now uniquely positioned to be the biggest winners of the next wave of FII inflows.
Historically, large-cap Indian banks have served as the proxy for foreign capital entering the country due to their high liquidity and deep market capitalization. This dynamic, however, cuts both ways, according to the expert. "Banks were hit the most due to FII outflows," Gundlapalle noted, pointing to the recent pressure on the sector as foreign funds reallocated assets. However, this positioning makes them the "major beneficiaries of likely FII inflows" as sentiment reverses and global capital returns to Indian equities.
Banks over NBFCs
When weighing the broader financial sector, Bernstein remains "more constructive on banks versus Non-Banking Financial Companies (NBFCs)." While Gundlapalle conceded that NBFCs remain the "key choice in terms of real innovation", frequently outpacing traditional lenders in niche credit delivery and digital onboarding-banks possess structural advantages in a shifting macroeconomic environment and technological advancements in the age of artifical intelligence.
Crucially, the growth engine for the nation's largest lenders is shifting gears. Gundlapalle identified the corporate segment growth as the primary driver of large banks moving forward, capitalizing on a resurgence in private capex and robust balance sheets. Notably, shares of private banks have advanced following the RBI's easing of FCNR(B) and ECB norms, whereas metals lagged due to softer commodity prices.
Outlook amid deposit challenges
The path forward is not without operational hurdles. For one, capital management will require strict discipline. Gundlapalle warned that adding capital is a drag on RoEs (Return on Equity), meaning institutions must focus on organic efficiency rather than relying on frequent, dilutive equity raises. Furthermore, the battle for liabilities remains a critical metric for performance:
The Deposit Boost: A pickup in deposit growth is a key positive for private banks, which have faced compressed margins amid fierce competition for CASA (Current Account Savings Account) pools.
The FCNR(B) Drag: Conversely, relying on Foreign Currency Non-Resident (Bank) deposits is a less viable alternative. Gundlapalle flagged that FCNR(B) deposits are currently costly and significantly less profitable for banks.
Looking ahead, the banking sector is expected to see a level-playing field. Bernstein expects a convergence in banks' loans growth, signaling that the wide performance gaps between top-tier competitors may begin to narrow. As Gundlapalle concluded, loan mix trends will be the ultimate decider of exactly how much individual banks benefit from this imminent wave of foreign capital. Banks that successfully balance high-yield corporate lending with a low-cost deposit franchise are set to outpace the rest.
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