Just as blood vessels run through our body keeping it alive and running, banks and their networks are the lifeblood of an economy. Banks offer citizens a way to safely store and grow their hard-earned savings in the form of deposits. These deposits are in turn used to create credit. This credit fuels consumer borrowing to create assets like homes and to fund educations. Businesses too use this credit facility to invest and grow their businesses. As businesses grow, they create jobs. More jobs mean more income and savings in the hands of people, part of which finds its way into the banking system as fresh savings. Banks thus have a multiplier effect on the economy by facilitating savings, credit, investments and growth.

With the Indian economy on track to becoming a $5 trillion economy by 2027, the Indian banking sector and especially the private banking sector is going to play a critical role as the engine of this growth.  The sector’s influence on the Indian economy is evident from the fact that almost a third of the Nifty 50 index, which represents the 50 largest Indian businesses, is made up of private banks. Additionally, 37% of Nifty 50 index’s profits are attributable to private banks for the year 2024-25.

A simple and smart way to take exposure to this sector is through the Nifty Private Bank index. This index reflects the performance of top 10 private sector banks in India based on market capitalization. On an annualized basis, the Nifty Private Bank TRI (Total Return index) has yielded a 18.6% return over a 20-year period, significantly higher than the Nifty 50 TRI’s 14.4%. The Nifty Private Bank TRI has outperformed the Nifty 50 TRI 6 times in the last 10 calendar years. On a rolling return basis, the bank index has outperformed the benchmark index over 1-year, 3-year and 5-year periods between April 2005 and June 2025.

This sector has seen consistent growth in recent years. The Net Interest Income of private banks has grown from Rs 75,000 crore in financial year 2015 to more than Rs 3,50,000 crore in financial 2025. Similarly, Net Interest Margins are up from 2.6% in FY2015 to 4.6% in FY2025. Loan market share of private banks has moved up from 19% in FY2015 to 36% in FY2025. Deposit market share too has doubled from16% to 32% between FY2015 and FY2025.

Looking ahead, private banks as a sector are favourably positioned for robust returns. India’s growth momentum is expected to receive a boost from the now easing monetary policy. Starting this February, the Reserve Bank of India has cut the repo rate by 100 basis points. This is expected to give credit offtake a boost as lower rates encourage consumers and businesses to borrow more. Easier repayment conditions also reduce the risk of Non-Performing Assets for banks. Banks will also benefit from mark to market gains on their government bond holdings as lower interest rates push up prices. The central bank has initiated a phased reduction of the Cash Reserve Ratio, which should also help banks lend more.

While lower rates may put pressure on interest margins, private banks, whose portfolios are usually diversified between interest income and fee-based income, will be better positioned than their public counterparts. Capital adequacy ratio of private banks is currently comfortably high at 17.29%, compared to Reserve Bank of India’s mandate of 11.7%. As of May 2025, Nifty Private Bank index is trading at a price-to-earnings ratio of 17.6 compared to the Nifty 50’s 22.3, making it a smart investment from a valuation perspective.

Mutual fund investors can invest in the Nifty Private Bank index through a Nifty Private Bank index fund. These funds passively mimic the underlying index and are a low-cost way to tap into India’s private banking sector. Instead of investing a large amount individually in each of the private bank stocks, index funds are a way to take diversified exposure to this sector with limited capital. Investors can systematically invest in Nifty Private Bank index funds using the SIP route. All in all, these funds offer a convenient way to invest in India’s long term growth story through dedicated investment in one of its leading sectors.

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