Speaking to ET Now, Shah said PSU banks outpaced system-level credit growth in Q3, aided by favourable seasonality and a relatively stable macro environment. “Year-on-year growth for PSU banks has been better than the system. That said, whenever PSU banks grow faster, asset quality needs close monitoring over time,” he cautioned.
HDFC Bank guides for system-level growth in FY26
Commenting on HDFC Bank’s Q3 performance, Shah said the results were largely in line with expectations. The bank has guided for growth in FY26 that is broadly in line with the overall banking system, with aspirations to outgrow the system thereafter.
He highlighted that liquidity conditions have improved significantly compared to last year, supported by a CRR cut and liquidity infusion under the new RBI leadership. “With improved liquidity, credit-deposit ratios are getting more stretched. That could be an area where HDFC Bank may not fully deliver on its near-term guidance,” Shah said.
Smaller private banks still in transition mode
Shah noted that smaller private sector banks have lagged system growth, which he said was expected given ongoing transformations. Banks such as Yes Bank and RBL Bank, which recently raised capital and saw management changes, are likely to take time before growth momentum picks up.
“Capital infusion and changes in promoter or management structure typically take six months to a year to translate into stronger business momentum,” he said.
Small finance banks see gradual rebound
Among small finance banks (SFBs), Shah said growth has rebounded in pockets, particularly those with exposure to microfinance. He cited improved discipline at the ground level, including the implementation of the three-lender policy, which has helped stronger borrowers access higher loan amounts.“This is not a one-quarter sharp recovery. It’s a gradual rebound, and well-placed SFBs are benefiting from that,” he added.
Microfinance stress easing, but uneven recovery
On the microfinance segment, Shah said there are early signs of easing stress following regulatory interventions. Since the RBI adjusted risk weights for microfinance loans earlier this year, asset quality trends have gradually improved.
“Better-diversified NBFCs have managed this phase well. Disbursements have picked up for some players, and regional issues such as those seen in Karnataka have also started stabilising,” he said.
Bajaj Finance, top NBFCs see moderated growth
Shah said Bajaj Finance’s Q3 numbers were in line with management guidance but slightly softer due to a slowdown in MSME lending and housing finance. He added that similar moderation has been visible in other fast-growing NBFCs such as Cholamandalam Investment and Finance, indicating a broader sectoral trend.
“For NBFCs, the key monitorable remains credit costs. Sustained improvement below the 2% level would be a strong positive signal,” Shah said.
Q3 takeaway: PSU banks ahead, selective opportunities elsewhere
Summing up the quarter, Shah said PSU banks currently lead the BFSI pecking order, followed by selective opportunities in small finance banks and diversified NBFCs. However, he stressed that investors should closely track asset quality trends and credit costs as growth accelerates in parts of the sector.