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Investment & Finance Sector Analysis Report 

[Key Points | Financial Year '19 | Prospects | Sector Do's and dont's]

Covid-19 Special 3x Opportunity: Five "Essential" Stocks to Buy Before the Lockdown Ends...

  • 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.
  • The banking regulator has allowed new entities such as payments banks to be created recently thereby adding to the types of entities operating in the sector. However, the financial sector in India is predominantly a banking sector with commercial banks accounting for more than 64% of the total assets held by the financial system.
  • The country’s financial services sector consists of the capital markets, insurance sector and non-banking financial companies (NBFCs). India’s gross national savings (GDS) as a percentage of Gross Domestic Product (GDP) stood at 30.5% in 2019.
  • India is one of the most vibrant global economies, on the back of robust banking and insurance sectors. The relaxation of foreign investment rules has received a positive response from the insurance sector, with many companies announcing plans to increase their stakes in joint ventures with Indian companies.
  • During the end of second quarter, amid certain defaults in the NBFC sector, a credit freeze was witnessed in the bond market especially for NBFCs. The spread of 5-year AAA corporate bond yield over 5-year G-sec yield went up, further the spread for NBFCs/HFCs were even higher with availability of liquidity being limited.
  • As per Union Budget 2019-20, 100% foreign direct investment (FDI) will be permitted for insurance intermediaries. The insurance sector will also be opened to 74% FDI from 49%. Government has approved 100% FDI for insurance intermediaries.

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 '19

  • 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 has introduced several reforms to liberalize, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These measures include launching Credit Guarantee Fund Scheme for Micro and Small Enterprises, issuing guideline to banks regarding collateral requirements and setting up a Micro Units Development and Refinance Agency (MUDRA).
  • The country is on a fast pace growth and is expected to become a US$ 5 trillion economy by 2022. Going by the estimates of Government of India, the country will need investments of US$ 4.5 trillion to build sustainable infrastructure by 2040.
  • A host of factors has enabled this growth, which includes a highly developed financial system, infrastructure requirements and proactive government regimes. Domestic and foreign investments both have had made an impact on the country’s growth.
  • The Government of India has taken various steps to deepen the reforms in the capital markets, including simplification of the Initial Public Offer (IPO) process which allows qualified foreign investors (QFIs) to access the Indian bond markets.
  • 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 (US$ 492.6 billion) by 2022.
  • The government’s focus on infrastructure development in the country is expected to provide huge scope to NBFCs engaged in infrastructure financing. By 2022, India’s personal wealth is forecasted to reach US$ 5 trillion at a CAGR of 13%.

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