DSP Mutual Fund's Preethi R S maintains a constructive outlook on India's financial sector, favoring lenders with strong deposit franchises, disciplined underwriting and execution. According to reports from The Economic Times, she sees healthy retail and SME credit demand, early corporate lending recovery and opportunities across banks, NBFCs and non-lending financials amid India's long-term financialisation. The DSP Banking & Financial Services Fund has approximately 73% invested in lenders, with about 47% allocated to banks and the remainder to finance companies, insurance, capital-market businesses and fintech platforms. As reported by The Economic Times, India's financial stocks are entering a more selective phase, where the strength of a lender's deposit franchise, underwriting discipline and execution could matter more than whether it is a bank or a non-bank financier.
The fund differentiates itself through structural allocation to non-lending financials, which account for roughly 25% of the portfolio compared with around 11% in the benchmark. As reported by The Economic Times, over time, the portfolio aims to increase exposure to high-quality franchises across asset management, exchanges, wealth management, insurance and fintech platforms. These businesses typically operate with asset-light, capital-efficient models and rely less on leverage than traditional lenders, standing to benefit from India's long-term financialisation. The fund also maintains an overweight allocation to non-lending financials relative to the benchmark, with valuations remaining an important consideration, particularly in wealth management and brokerage businesses where earnings can be cyclical.
Leading private banks have built strong deposit franchises, healthy balance sheets and disciplined underwriting practices, with asset quality across the segment remaining supportive. According to The Economic Times, the fund compares expected earnings growth, return ratios, valuations and management execution before allocating capital. ICICI Bank and Axis Bank are the fund's two largest holdings, while HDFC Bank and Kotak Mahindra Bank have comparatively smaller weights. The fund also owns PSU banks, small finance banks and regional lenders, looking for banks that demonstrate stronger underwriting, clear growth strategies and effective management execution. The growing presence of experienced leaders from established institutions has strengthened governance and execution across several banks, with the fund often initiating positions during periods of market pessimism and increasing exposure as investment theses play out.
Many specialised NBFCs have built decades of expertise across niche customer segments, geographies and underwriting models that remain difficult to replicate. As reported by The Economic Times, vehicle financiers have developed deep capabilities in used vehicles and borrower segments where conventional bank underwriting may be less effective. Similarly, diversified consumer lenders continue to benefit from broader product offerings, faster turnaround times and stronger cross-selling capabilities. The fund's major NBFC positions include Cholamandalam Finance, Shriram Finance and Bajaj Finance. Warning signs for reducing NBFC exposure include demand weakness across key end-markets such as vehicles, customer leverage rising sharply, material tightening of liquidity, sharp rise in interest rates, or deterioration in underwriting standards and execution. These businesses typically operate with asset-light, capital-efficient models and complement traditional lenders within the portfolio.
Credit cycles are never static, with asset quality across the system remaining benign while consumer cash flows, employment conditions and leverage levels will determine how the cycle evolves. According to The Economic Times, headline asset quality remains strong, but concerns remain around microfinance, unsecured consumer loans and certain small-ticket lending segments. A sharp deterioration in the macro environment could challenge the outlook, with global shocks, weaker employment and wage growth, or rising leverage among households and small businesses potentially weighing on both credit demand and repayment behaviour. The fund continues to monitor these risks closely while maintaining its constructive sector outlook, with expectations that margins will evolve differently across lenders based on the strength of their liability franchises and the interest-rate environment.
