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Investment & Finance Sector Analysis Report 

[Key Points | Financial Year '18 | Prospects | Sector Do's and dont's]

  • India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities.
  • There are 11,522 Non-Banking Financial Companies (NBFCs) registered with the Reserve Bank of India out of which a lion's share of 98.5% are non-deposit accepting with the balance 1.5% being deposit accepting NBFCs. Around 218 non-deposit accepting NBFCs have been classified as systemically important. NBFCs have established presence in specialized segments, for e.g. HDFC (mortgage loans), Mahindra Finance (agri finance), Power Finance Corporation (power finance) & Shriram Transport Finance (pre-owned commercial vehicle finance).
  • With a combined push by both government and private sector, India is undoubtedly one of the world's most vibrant capital markets. In 2017, a new portal named 'Udyami Mitra' has been launched by the Small Industries Development Bank of India (SIDBI) with the aim of improving credit availability to Micro, Small and Medium Enterprises' (MSMEs) in the country. India has scored a perfect 10 in protecting shareholders' rights on the back of reforms implemented by Securities and Exchange Board of India (SEBI).
  • Present in the competing fields of vehicle financing, housing loans, hire purchase, lease and personal loans, NBFCs, have emerged as key financial intermediaries for small-scale and retail sectors thereby forming an essential part of shadow banking in India. NBFCs are the third largest segment in the Indian financial system after commercial banks and insurance companies and account for 9% of the total financial assets.
  • But unlike the shadow banking entities in other countries, NBFCs are regulated by the Reserve Bank of India that has been working towards bringing them at par with the banking regulations. Armed with easier sanction procedures, flexibility, and wide reach in small towns and cities, NBFCs stand on a surer footing vis-a-vis banks.
  • Unlike banks, NBFCs are not required to maintain cash reserve ratio (CRR) and statutory liquid ratio (SLR). Even priority sector lending norm of 40% (of total advances) is not applicable to them.
  • But NBFCs cannot access low-cost deposits like their banking peers. Borrowings make up a lion’s share of 70% of their liabilities, as per CARE Ratings. A number of NBFCs have been issuing non-convertible debentures (NCDs) in order to increase liquidity. For systemically important NBFCs, debentures had the largest share 49% of borrowings in FY17. Bank borrowings and commercial paper account for 22% and 10% in the liability mix.
  • In November 2014, the Reserve Bank of India tightened norms in asset classification and provisioning for NBFCs to bring them at par with banks. The time period after which an overdue asset would be classified as a non-performing was reduced from six months to three months in a phase-wise manner until FY18.

How to Research the Investment & Finance Sector (Key Points)

  • Supply
  • Plenty to meet personal finance needs but not enough to meet long-term infrastructure needs.
  • Demand
  • India being a growing economy, demand for long-term loans, especially infrastructure and personal finance is high.
  • Barriers to entry
  • Licensing requirement, investment in technology, skills required for project finance, distribution reach, minimum capital requirements, etc.
  • Bargaining power of suppliers
  • Providers of funds could be more demanding, base rate requirements are applicable.
  • Bargaining power of customers
  • High, as banks have also forayed into long-term finance and consumer finance.
  • Competition
  • High, there are public sector, private sector and foreign banks along with non-banking finance companies competing in similar markets.

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Financial Year '18

  • The Government of India launched India Post Payments Bank (IPPB), to provide every district with one branch which will help increase rural penetration. As of August 2018, two branches out of 650 branches are already operational.
  • Under the Union Budget 2018-19, the government has allocated Rs 3 trillion (US$ 46.3 billion) towards the Mudra (Micro-Units Development & Refinance Agency Ltd) Scheme. As per the Union Budget 2018-19, the recapitalisation of PSBs is expected to allow banks to lend additional Rs 5 lakh crore (US$ 77.2 billion).
  • As of September 2018, the Securities and Exchange Board of India (SEBI) has limited the total expense ratio (TER) charged by mutual fund houses having equity assets up to Rs 500 billion (US$ 7.1 billion) to 1.05%.
  • NBFCs are rapidly gaining prominence as intermediaries in the retail finance space. NBFCs finance more than 80% of equipment leasing and hire purchase activities in India The public deposit of NBFCs increased from US$ 0.3 billion in FY09 to Rs 319 billion (US$ 4.9 billion) in FY18, registering a Compound Annual Growth Rate (CAGR) of 36.8%.
  • In September 2018, corporate investors AUM stood at US$ 127.3 billion, while HNWIs and retail investors reached US$ 99.2 billion and US$ 80.4 billion, respectively.
  • Inflows in India's mutual fund schemes via the Systematic Investment Plan (SIP) route reached Rs 67,190 crore (US$ 10.4 billion) during FY18 from Rs 43,921 crore (US$ 6.5 billion) during FY17. During April-October 2018, Rs 524.7 billion (US$ 7.5 billion) was collected.

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Prospects

  • The Government of India launched India Post Payments Bank (IPPB), to provide every district with one branch which will help increase rural penetration. As of August 2018, two branches out of 650 branches are already operational.
  • India's mobile wallet industry is estimated to grow at a Compound Annual Growth Rate (CAGR) of 150% to reach US$ 4.4 billion by 2022 while mobile wallet transactions to touch Rs 32 trillion (USD $ 492.6 billion) by 2022.
  • Financial sector growth can be attributed to rise in equity markets and improvement in corporate earnings.
  • In FY17, individual wealth in India expanded to Rs 344 lakh crore (US$ 5,337.4 billion) from Rs 310 lakh crore (US$ 4,620.6 billion) in FY16.It increased growth rate from 10.9% in FY17 to 8.5% in FY16.
  • By 2022, India’s personal wealth is forecasted to reach US$ 5 trillion at a CAGR of 13% . It stood at US$ 3 trillion in 2017.
  • The government’s focus on infrastructure development in the country is expected to provide huge scope to NBFCs engaged in infrastructure financing.

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