Neobanking is getting all the love on Dalal Street but here's why you should pick wisely

"There are going to interesting times ahead as fintech firms transform banking... Profit pools will shrink, unbanked customers will get new offerings and get integrated into the financial system, and banks will be forced to come up with better service and better price-value equations to customers," market expert Ajay Bagga told CNBCTV18.com.

"It is good for the entire ecosystem," he said.

His remarks come at a time when most banks have consistently reported signs of healthy loan growth even as the RBI has begun increasing the cost of money after keeping the repo rate — the key lending rate — at a record low for two back-to-back years to tackle the COVID pandemic.

So what does neobanking bring to the table?

These players promote enhanced customer reach for lenders as well as enrich customer experience for the end-user. Investors broadly have two categories to take a pick from: relatively newer entrants offering a pure fintech play and existing banks going big on fintech.

Indian equity benchmarks continue to struggle in a correction phase since October 2021 amid sustained selling by foreign institutional investors and wild gyrations across global markets, amid fears that aggressive hikes in pandemic-era interest rates will cause an economic slowdown.

Many experts though positive on the space suggest exercising caution while choosing from the many options to play the theme.

Investors looking to tap into the fintech space must be careful and selective, Tanushree Banerjee, Co-Head of Research at Equitymaster, told CNBCTV18.com.

"Among the large number of fintech startups in India today, not many have a profitable and viable business model... Commercial banks are certainly well placed to tap into the space given their lending experience and well-built network... Investors must keep a close eye on cash flows and balance sheets," she said.

And that applies not only to investors approaching the segment as a pure-play bet, but also those who find largecap lenders relatively safer to bet on fintech indirectly.

Many experts feel countering the disruption is not a piece of cake for conventional lenders, be it banks or shadow banks.

"Banks will have the challenge of refreshing their legacy systems and take on fintechs. They will acquire fintech competitors or will have to build fintech (operations) within their legacy operations," added Bagga, who is of the view that compliance and risk management will be key for fintech players to survive and thrive.

Then there are those who believe that regulation that is a headwind for fintech companies should work in favour of banks.

"There is a lot of excitement around fintech markets, but we don’t think they will affect the banking operations... Banks and financial institutions are large, they have scale, are hugely profitable and will be able to offer easy convenience and seamless banking," said Raj Vyas, Portfolio Manager at Teji Mandi.

For instance, the RBI's decision to bar fintech firms from loading prepaid instruments with credit lines should have a positive impact on banks, which have a large base of credit card users, he pointed out.

Vyas is among the many analysts positive on the banking basket as a whole.

He sees improvement in demand for loans as well as borrowers' credit worthiness in tandem with economic growth going forward.