Finance: Bright future ahead - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Finance: Bright future ahead

Jan 16, 2001

World over the financial markets are in a transformation phase. The Indian financial sector is witnessing unprecedented changes fueled by economic deregulation and technological innovation. The companies in the sector are getting aggressive with the improved industry scenario. Leading financial institutions are diversifying their product portfolio from their core business of project and infrastructure finance. This is to minimize the risk of financing to projects with large gestation period. RBI has permitted FIs to adopt the ‘Universal Banking’ concept through which they can now offer a whole range of financial services beyond commercial banking and investment banking. The domestic financial institutions (FIs) have leaped onto the ‘Universal Banking’ bandwagon to capitalise on the boom that lies ahead. However, RBI is yet to come out with clear guidelines on the institutions becoming Universal Banks.

Institutions such as ICICI and IDBI took the lead in setting up the subsidiaries to offer a host of financial services and products. They are foraying into new areas and stepping up their presence in the global financial markets. ICICI is the first Indian company to get listed on NYSE. The institution has already web-enabled its financial products and is also seriously looking at opportunities in mobile banking and universal banking.

In the past one year, activity in the financial sector has perked up due to the economic and industrial recovery. Sanctions of All India Financial Institutions witnessed a growth of 26% to Rs 1,036 bn and disbursements grew by 19% to Rs 671 bn. Also the increased disbursals by housing finance companies and the pick up in activity in the core sectors contributed in furthering the growth. Among the FIs, ICICI recorded higher growth in its disbursements and approvals compared to IDBI and IFCI.

(Rs bn) Sanctions Disbursements
  1HFY00 1HFY01 Change 1HFY00 1HFY01 Change
ICICI 241 317 31.5% 110 167 51.7%
IDBI 140 148 5.3% 75 79 5.7%
IFCI 10 6 -37.8% 17 8 -51.4%

With the opening up of the insurance sector HDFC, ICICI and finance companies including Sundaram Finance and Kotak Mahindra are aggressively planning to foray into the insurance business. The strategic alliances coupled with a technology edge and e-commerce initiatives are likely to give added advantage to companies like HDFC and ICICI.

The demarcation line between FIs and banks are getting thinner with increasing competition, and spreads are getting squeezed. Banks are entering into domain of long term financing. On the other hand institutions have started offering short-term finance, which was earlier forte of the commercial banks. However, FIs are still to enjoy the sort of freedom banks have in accepting demand deposits, which can bring down their cost of funds.

The critical factor to determine the performance of financial institution is the level of their non-performing assets (NPAs). FIs, historically have major customers from the steel, textile and chemical sector who had made heavy borrowings from them. If the economy fails to improve, the NPAs could increase further, adversely affecting the financial performance of these institutions. A rise in NPAs also trigger doubt about the actual magnitude of the problem leading to questions on the credibility of financial data. Among the financial institutions, IFCI has the highest level of non-performing assets to advances ratio of 20.7% compared to its peers IDBI (12.3%) and ICICI (7.6%).

Apart from NPA provisions, the RBI’s recent guideline relating to investments valuations of FIs is likely to hit their bottomline growth. According to the guidelines, FIs are required to classify their investments under three categories ‘held to maturity’, ‘available for sale’ and ‘held for trading’ in line with banks. While the valuation of securities under the ‘held to maturity’ category (up to 25% of the investment portfolio) need not be marked to market, securities under the other two categories should be marked to market at a year-end or more frequent levels. This could affect profits of FIs as they are now required to make higher provisions for the depreciation in the value of their investments.

Nevertheless, the future of Indian finance industry seems bright in the light of initiatives taken by the RBI and technological evolution. Financial institutions are getting ready to face the competitive scenario with the liberalization of the economy. The emergence of Internet as an alternative delivery platform is changing the way the business is conducted. Institutions with the ability to adapt to new market conditions, introduce innovative products, which are better priced and delivered quickly are likely to succeed in the long term.

Equitymaster requests your view! Post a comment on "Finance: Bright future ahead". Click here!

  

More Views on News

SHARE INDIA SECURITIES 2020-21 Annual Report Analysis (Annual Result Update)

Nov 18, 2021 | Updated on Nov 18, 2021

Here's an analysis of the annual report of SHARE INDIA SECURITIES for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of SHARE INDIA SECURITIES. Also includes updates on the valuation of SHARE INDIA SECURITIES.

PILANI INVESTMENT & IND. 2020-21 Annual Report Analysis (Annual Result Update)

Nov 10, 2021 | Updated on Nov 10, 2021

Here's an analysis of the annual report of PILANI INVESTMENT & IND. for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of PILANI INVESTMENT & IND.. Also includes updates on the valuation of PILANI INVESTMENT & IND..

MULTI COMMODITY Announces Quarterly Results (2QFY22); Net Profit Down 43.3% (Quarterly Result Update)

Oct 26, 2021 | Updated on Oct 26, 2021

For the quarter ended September 2021, MULTI COMMODITY has posted a net profit of Rs 332 m (down 43.3% YoY). Sales on the other hand came in at Rs 832 m (down 30.5% YoY). Read on for a complete analysis of MULTI COMMODITY's quarterly results.

Indian Railway Finance Corporation IPO: Should You Apply? (IPO)

Jan 18, 2021

Monopolistic railway financer with impeccable asset quality.

LIC HOUSING Announces Quarterly Results (2QFY22); Net Profit Down 68.4% (Quarterly Result Update)

Oct 26, 2021 | Updated on Oct 26, 2021

For the quarter ended September 2021, LIC HOUSING has posted a net profit of Rs 2 bn (down 68.4% YoY). Sales on the other hand came in at Rs 47 bn (down 5.2% YoY). Read on for a complete analysis of LIC HOUSING's quarterly results.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS