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Finance: Bright future ahead - Views on News from Equitymaster
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  • Jan 16, 2001

    Finance: Bright future ahead

    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.



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