Why Shankar Sharma is wary of Indian banks and NBFCs in a late-stage bull market

Mint

5 days ago

Shankar Sharma, veteran market investor and GQuant founder, expressed caution over the rising enthusiasm for Indian banks and non-banking financial companies (NBFCs), warning investors to consider the macro cycle before chasing these financial stocks.
While the Indian bank stocks have remained the apple of investors' eyes — not just retail but also institutional — over a long period of time, Shankar Sharma hints that now may not be the time to invest in them.
In a social media post on X, Shankar Sharma noted that while he has never owned a single bank or NBFC stock — with the lone exception of HDFC Bank — he explained what makes them attractive at certain points in the economic cycle.
"Leveraged financials are generally GREAT at the beginning/early stage of the economic cycle/bull market," Sharma pointed out, taking the example of ICICI Bank in 2003-04.
The rationale behind his statement is straightforward: During the early phases of economic expansion, credit demand is strong, repayment capacity is healthy, and the risk of defaults remains low. In this phase, banks and NBFCs benefit from rising loan growth and expanding profitability. It also supports margins for the finance companies.
However, Sharma cautioned that the same category of stocks becomes risky in a mature or late-stage bull market. As he put it, "Leveraged financials are usually not the best places to be in, in an old, wrinkled bull market/late stage economic growth cycle. Because that's when the excesses of the previous lending boom start coming home to roost."
The reason? The excesses of the previous lending boom tend to show up during the late stages of the cycle. Loans made during optimistic times may begin to sour, as asset quality deteriorates and non-performing assets (NPAs) starting to rise. This often puts pressure on banks and NBFCs' earnings and stock performance.
Shankar Sharma's remarks come at a time when Indian banking stocks have seen strong gains. Many retail investors have been chasing these names, assuming continued outperformance.
His view comes as a reminder to evaluate where we are in the economic cycle before making sectoral bets.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.