Banks will outpace shadow banks or non-banking financial companies (NBFCs) in terms of growth, said Credit Suisse's Ashish Gupta, while also adding that within these shadow banks he prefers those into vehicle and personal finance space.

“I would prefer banks over NBFCs. Even in terms of growth, you will see that banks outpace NBFCs,” Gupta, Head of Equity Research-India and Financials-Asia Pacific at Credit Suisse told CNBC-TV18.

Most of the banks, including larger ones, will probably grow faster than most NBFCs, Gupta added.

“We like some NBFCs, which are vehicle financiers and also some personal finance NBFCs. So it is not so much segmental driven within the NBFC but more company specific."

Gupta expects to see tight liquidity conditions in six months from now.

“While the Reserve Bank of India (RBI) has reduced the magnitude of liquidity surplus, we still don’t have deficit liquidity. In six to nine months from now, the liquidity moves into deficit and you will see sharper deposit costs increases and that is a scenario that will favour the larger banks more than the mid-sized banks."

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Banks will also surprise on margins and credit costs, he added.

“In the last fifteen years, we haven’t seen the outlook for banks so positive on every front, whether it is margins or growth or on asset quality. The bigger drivers of surprise will be bank margins as well as credit costs."

In fact, the banking sector could see a favourable situation like between 2003 and 2007 in terms of the cost of credit and this typically happens in every credit cycle.

During the credit cycle, banks pull back on lending and tighten their credit standards and therefore the industry gets a below normalised credit cost.

“I believe that over the next two years, you will get below normalized credit costs for the banking system, and this will be across the space,” Gupta said.

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“We need to be a bit more cautious on growth. We have to take into account the fact that part of the loan growth acceleration that we have seen is driven by the fact that real rates were negative,” he mentioned.

He believes by the end of the year, the real rates will get into the positive territory as RBI is going to be hiking rates some more as well as the fact that inflation will come down.

For the full interview, watch the accompanying video