India’s financials sector continues to face challenges, with earnings under pressure due to multiple factors, says Rahul Jain, Head of APAC Financials and India Equity Research at Goldman Sachs.

There are asset quality concerns, with microfinance and unsecured lending remaining the areas of stress, while credit growth has slowed.

“The asset quality in unsecured is going through its journey. We have seen the credit growth drop significantly from the highs of mid-teens to high-teens and also the rate cuts which will have bearing on the margins initially and then gradually we see how the deposit rates shape up,” he noted.

Jain expects earnings cuts for the sector to bottom out by the June or September quarter. He sees regulatory support as a positive, citing recent measures such as easing risk weights on NBFCs and microfinance lending, which help reduce regulatory risks.

However, the market remains focused on when earnings will bottom out and how margins will be affected in the short term. Despite these challenges, Jain points out that the banking sector has held up relatively well compared to other sectors in recent months.

He believes that once confidence in fundamentals improves, the sector should start recovering, though some headwinds will persist.

Jain believes that while the microfinance sector is expected to improve in the coming quarters, profitability will take time to recover. He notes that the second half of the year is usually stronger, but this time, it has been weaker, and the sector is now entering a period that typically sees slower progress.

A meaningful recovery is more likely in the second half of the next financial year rather than in the immediate quarters.

Goldman Sachs remains selective in its approach, favouring stocks with stable asset quality and high earnings predictability. Sectors such as housing, commercial, and retail assets, where return on assets (ROAs) and asset quality are well-managed and valuations are reasonable, are preferred by investors at this stage.