Are Financial Services Breaking The Glass Ceiling?

While the financial services sector is at the forefront of India’s economic growth, India Stack is playing a pivotal role in fostering a more efficient, inclusive, and technologically advanced financial ecosystem in India. Mandar Wagh outlines the sector’s outlook while assessing whether the rally is sustainable, delving into the financial performance of companies, growth drivers and risk factors 

In the aftermath of the corona virus pandemic, the banking and financial services sectors played a pivotal role in propelling India’s economic growth. While some leading economies grappled with a banking crisis resulting from the collapse of major financial institutions, India’s banking system demonstrated resilience by effectively navigating credit, market, and liquidity risks. To counter inflationary pressures, central banks globally opted to raise interest rates, a move that proved advantageous for the financial sector, contributing to an uptick in net interest margins. [EasyDNNnews:PaidContentStart]

In recent quarters, nearly all banks have posted remarkable financial results, marked by significant growth in both net interest income and net profits. This positive trend has been fuelled by robust loan expansion and notable improvements in the asset quality of non-performing assets. The resilience of the banking sector has contributed to a widespread sense of optimism within the financial services industry. 

Considering sector-wise net investments, the banking and financial services sector attracted a substantial number of inflows, driven by corporate profits led by financial entities. The BSE Financial Services index, a sectoral gauge for financial services companies, gained 10 per cent over the last three months, while multiple stocks emerged as multibaggers. The question now is whether the rally is sustainable and what the future’s growth drivers and risk factors are.
 

Overview

India’s financial services sector is experiencing rapid expansion, characterised by robust growth in existing financial services firms and the entry of new entities into the market. This diversified sector encompasses commercial banks, non-banking financial companies (NBFCs), insurance companies, pension funds, mutual funds, stock broking and wealth management companies, housing finance, leasing, hire purchase companies and various other smaller financial entities. 

Notably, India stands as one of the world’s fastest-growing financial technology (fintech) markets and is the third-largest fintech ecosystem globally, boasting over 3,000 registered fintech start-ups. The fintech sector in India has experienced substantial funding, contributing to a 13-14 per cent share of global fintech funding. The major segments within the fintech industry encompass payments, digital lending, insurance technology and wealth technology. In the payments segment, companies focus on developing innovative solutions for electronic and digital transactions. 

Digital lending involves the use of technology to streamline and enhance the lending process, making it more accessible and efficient. Insurance technology leverages technology to innovate and improve various aspects of the insurance industry, from policy issuance to claims processing. Wealth technology focuses on using technology to optimise wealth management and investment services, providing individuals with digital tools for financial planning and investment decisions.
 

Financial Performance and Returns

Assessing the financial performance of the top 20 financial services companies based on market capitalisation, it is evident that almost all the companies exhibited robust double-digit revenue growth in Q2FY24 compared to the same period last year. Poonawalla Fincorp Ltd. recorded the highest growth at 63 per cent year-on-year, while Credit Access Grameen Ltd. and Cholamandalam Investment and Finance Company Ltd. were also notable performers in this regard. 

The aggregate revenue growth observed among the top 20 companies was around 28-29 per cent year-on-year (YoY), showcasing resilience in their performance. On the profitability front, with the exception of Bajaj Holdings and Investment Ltd. and Mahindra and Mahindra Financial Services Ltd., all the other companies registered noteworthy double-digit year-onyear growth in their net profit. Poonawalla Fincorp and LIC Housing Finance surpassed others by a significant margin. 

The aggregate year-on-year growth in net profit stood at 35 per cent, emphasising the robust profit-making capabilities of financial services companies. Examining the share price movements among the top 10 financial services companies by market capitalisation, Cholamandalam Investment and Finance Company garnered investor attention by delivering an impressive 90 per cent returns in just one year.

Shriram Finance Ltd. and L and T Finance Holdings Ltd. also exhibited substantial rises, with gains of 80 per cent and 75 per cent, respectively, over the past year. Numerous stocks maintained a consistent and robust upward trajectory, consecutively hitting upper circuits owing to substantial buying demand from investors. Jhaveri Credits and Capital Ltd. and Pulsar International Ltd. were notable examples, significantly augmenting the wealth of investors by soaring more than 1,000 per cent in just one year!
 

Growth Drivers
 

India Stack has significantly transformed the financial services sector by providing a comprehensive digital infrastructure. Leveraging components such as Aadhaar, e-KYC and UPI, it has promoted financial inclusion by simplifying identity verification, streamlining digital payments, and enabling paperless transactions. The platform’s impact extends to lending, where e-KYC facilitates quicker loan approvals, and it has spurred innovations in insurance through simplified onboarding processes. 

The emphasis on digital consent and secure data sharing enhances transparency and user control. Overall, India Stack has played a pivotal role in fostering a more efficient, inclusive, and technologically advanced financial ecosystem in India. Month by month, the volume of UPI (Unified Payments Interface) transactions shows a consistent upward trend, reaching a total monthly transaction amount of ₹ 18.23 lakh crore in December 2023. This figure marks a substantial growth of 54 per cent compared to the corresponding data in 2022. 

The financial services sector in India has witnessed significant growth, driven by the country’s vast consumption market, a substantial young population and rising income. Factors such as the rising number of smart phone users, a concerted push towards digitalisation, and ongoing efforts in rural digitisation have played instrumental roles in fostering this growth. Access to credit, insurance and investment opportunities is on the upswing in rural areas, indicating a growing presence and utilisation of financial services in these regions.

In 2023, the government revamped the credit guarantee scheme, injecting ₹ 9,000 crore into the corpus of the Credit Guarantee Fund Trust for Micro and Small Enterprises. This substantial inflow is poised to provide micro, small and medium enterprises (MSMEs) with increased access to collateral-free loans, signalling a significant boost to the sector’s financial support and growth prospects. In the Union Budget 2022-2023, India revealed its intentions to introduce a central bank digital currency (CBDC) named ‘digital rupee’. 

In December 2023, the digital rupee achieved a milestone by surpassing one million transactions in a single day. In the upcoming five-year period (2024-2028), industry experts anticipate a robust growth trajectory for the Indian insurance sector, with total insurance premiums expected to rise more than 7 per cent in real terms. This growth rate significantly surpasses the averages seen in global, emerging and advanced markets. If this trend persists, India is poised to emerge as the G 20 country with the fastest-growing insurance sector. The Indian insurance industry is expected to reach a market size of USD 280 billion by 2025.
 

Risk Factors 

Credit risk has remained a persistent concern within the financial services sector. Following the onset of the corona virus pandemic, there has been a notable surge in the issuance of small-ticket loans, personal loans and consumer durables loans. These unsecured retail loans have experienced significant expansion, indicating a considerable demand for consumption financing, particularly among the millennials and members of Gen Z. The uptick in credit card lending has coincided with a noteworthy rise in payment defaults on credit cards. 

Recognising the substantial growth in specific segments of personal loans, Reserve Bank of India Governor Shaktikanta Das underscored the necessity for vigilant monitoring of these loans to identify potential signs of emerging stress. In response to this trend, the RBI has issued a cautionary note, sounding an alarm and advising banks to strengthen their risk management systems. Additionally, the RBI has heightened risk weights for both banks and non-banking financial companies (NBFCs). 

Financial markets are vulnerable to volatility, and changes in interest rates, currency exchange rates and commodity prices can influence the worth of assets and the profitability of financial institutions. Forecasts suggest that there could be a reduction in interest rates by the RBI in the forthcoming quarters. A decrease in lending rates may place stress on the profit margins of banks, affecting their overall profitability. However, the reduced rates can encourage borrowing, leading to an increased demand for loans, thereby bolstering the broader financial sector. In a low-interest-rate scenario, insurance companies may face difficulties as their investment returns could be affected. 

Individuals relying on interest income from savings accounts or fixed-income investments may experience reduced returns, given the decline in interest rates, leading to lower yields on these investments. Significant fluctuations in currency exchange rates could raise concerns. Individuals or entities with exposure to foreign currency-denominated assets or liabilities may face valuation losses or increased debt burdens, especially if they have borrowed in US dollars. Moreover, banks relying on external commercial borrowings (ECBs) or holding foreign currency liabilities may encounter heightened challenges in repaying such obligations. 

Clients or borrowers of Indian banks engaged in importdependent businesses might experience a compromised ability to repay, potentially leading to an increase in non-performing assets. In addition, regulatory bodies may respond to economic conditions by implementing policies that have an impact on the BFSI industry. Observing India’s proactive approach to risk identification and control, coupled with the RBI’s steadfast commitment to mitigating diverse risks to uphold economic stability and growth, the Indian financial services sector demonstrates the capability to navigate and thrive amidst challenges! 

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