Retail investors are rewriting the rules. The rise of retail investors in India’s equity market is no fleeting trend; it is a seismic shift. Crossing the 10 crore mark in August 2024 and surging to 10.9 crore by December, these investors now command 17.6% of the market capitalisation on the NSE. This surge reflects not just growing affluence but also a deeper understanding of market mechanics among Indians. Their increasing preference for small and midcap stocks signals evolving investment strategies and a willingness to seek higher returns.

NBFCs show strong growth

Non-Banking Financial Companies (NBFCs) are mirroring this bullish trend. Mahindra Finance reported a 7% jump in disbursements for Q3 FY25 and an impressive 18% growth in business assets. L&T Finance also showcased a 23% surge in their retail loan book, driven significantly by urban finance. This expansion underscores the continued demand for financial services and the crucial role NBFCs play in meeting diverse credit needs across urban and rural India.

RBI focus on fair lending

However, this growth narrative comes with a regulatory undercurrent. The Reserve Bank of India’s (RBI) recent lifting of restrictions on Arohan Financial Services, after imposing them over concerns about lending rates, highlights the regulator’s watchful eye. While Arohan rectified its practices to align with RBI guidelines, this episode serves as a reminder of the central bank’s commitment to fair lending practices and consumer protection within the microfinance sector.

Market valuations and outlook

Amidst this backdrop, market valuations present a mixed picture. Five-Star Business Finance, despite a recent share price bounce, appears undervalued with a P/E ratio of 24x, lower than the market average. Analysts predict continued earnings growth for the company, yet the subdued P/E suggests investor caution, possibly due to concerns about sustaining high growth rates or unforeseen market risks. This discrepancy between forecast and valuation warrants closer examination.

What should investors consider? As retail participation deepens and NBFCs expand, the Indian financial sector is poised for continued evolution. However, balanced growth, underpinned by regulatory vigilance and fair practices, will be critical. Investors should pay heed to asset quality of NBFCs and understand the factors driving market valuations to make informed choices in this vibrant yet evolving financial environment.