Indias Financial Sector Spins An Upward Spiral

With the Indian government implementing a number of reforms to liberalise, regulate and improve this industry, Bhavya Rathod explains how the country’s economy is currently among the most dynamic in the world due to its thriving banking and insurance industries 

India has a diverse financial sector that is rapidly expanding, both in terms of strong growth of the existing financial services and new entrants into the market. Commercial banks, insurance companies, non-banking financial companies, cooperatives, pension funds, mutual funds and other smaller financial entities make up the sector. Of late, the banking regulator has allowed for the formation of new entities such as payment banks, thus diversifying the types of entities operating in the sector. However, the Indian financial sector is dominated by commercial banks, which account for more than 64 per cent of the total assets held by the financial system. 

The Indian government has implemented several reforms to liberalise, regulate and improve this industry. The government and the Reserve Bank of India (RBI) have taken a number of steps to make it easier for micro, small and medium enterprises (MSMEs) to obtain credit. These measures include establishing a Credit Guarantee Fund Scheme for MSMEs, issuing collateral guidelines to banks and establishing a Micro Units Development and Refinance Agency (MUDRA). With a combined push from the government and the private sector, India has unquestionably become one of the world’s most vibrant capital markets. 

Further, the Bombay Stock Exchange (BSE), will form a joint venture with Ebix Inc. to establish a robust insurance distribution network in the country via a new distribution exchange platform. In FY22, USD 14.55 billion was raised through 127 initial public offerings (IPOs). The number of companies listed on the NSE increased from 135 in 1995 to 2,012 by FY22. As per the Futures Industry Association (FIA), a derivatives trade association, the National Stock Exchange of India (NSE) will be the world’s largest derivatives exchange in terms of contracts traded in 2020. According to data published by the World Federation of Exchanges (WFE), for CY20, the NSE was ranked fourth in the world in cash equities by a number of trades. 

Government Initiatives

Some of the prominent initiatives undertaken by the government include:

• Under the Union Budget 2022-23, the government allocated ₹ 1,538,779.45 crore to the Ministry of Finance.

• Under the Union Budget 2021-2022, the government approved 100 per cent FDI for insurance intermediaries and increased the FDI limit in the insurance sector to 74 per cent from 49 per cent.

• In August 2021, Prime Minister Narendra Modi launched e-RUPI, a personal and purpose-specific digital payment solution. This is a QR code or SMS string-based e-voucher that is sent to the beneficiary’s cell phone. Users of this one-time payment mechanism will be able to redeem the voucher at the service provider without the usage of a card, digital payments app or internet banking access.

• Insurance products are covered under the EEE (exempt, exempt, exempt) method of taxation. This translates to an effective tax benefit of approximately 30 per cent on select investments, including life insurance premiums, every financial year.

• Reduction in Securities Transaction Tax from 0.125 per cent to 0.1 per cent on cash delivery transactions and from 0.017 per cent to 0.1 per cent on equity futures.

• Indian tax authorities plan to sign a bilateral advance pricing agreements with many companies in Japan. The agreement is aimed at avoiding conflicts with multinational companies over sharing of taxes between India and the countries where these firms are based. 

Non-Banking Finance Companies

Non-banking financial companies (NBFCs) are accelerating financial inclusion in India by leveraging their superior understanding of regional dynamics and customised products and services. As of March 2022, the asset base of NBFCs had reached ₹ 54 trillion, accounting for nearly 25 per cent of the balance sheet of the country’s banks. At a time when the cost of funding for many NBFCs has risen, the Union Budget 2023 could provide some cushion for major NBFCs to improve liquidity measures. NBFC incremental borrowings have already risen by 100-150 basis points since April, and the credit rating agency expects these entities’ cost of funds to rise by 50-60 basis points in the coming months. 

The third quarter of the current fiscal year (FY23) will most likely be the best third quarter in recent years for NBFCs. The forecast is based on a strong quarter in which disbursements remained high and recoveries remained strong despite rising interest rates. Following its merger with Shriram Transport Finance Company and Shriram City Union Finance, Shriram Finance Limited has become India’s largest retail NBFC. Shriram Finance will have a net worth of approximately USD 5 billion and assets under management (AUM) of approximately USD 20 billion. With over 5,700 employees, the company has branches and outlets in approximately 3,600 locations across India. 

Financial Technology

With a market opportunity of USD 1.3 trillion by 2025, India’s fintech industry has significantly disrupted traditional financial services. India is experiencing a surge in fintech innovation and enterprise. It has elevated India to being the world’s leading fintech and start-up nation. However, the operating environment for Indian fintech start-ups is expected to take a dip this year due to a worsening funding winter and recent regulatory changes. Furthermore, with the release of the new digital lending guidelines, banks and NBFCs have moved away from first loan default guarantee (FLDG) partnerships, putting smaller fintechs at a disadvantage by forcing them to lend at higher costs. According to Tracxn data, funding in the Indian fintech ecosystem will nearly halve to USD 5.7 billion in 2022 from USD 10.3 billion in 2021. 

However, investments in Indian fintech are still significantly higher this year than in 2020 when the sector received only USD 2.02 billion in equity funding. With the RBI delivering a final blow to card-based fintechs by prohibiting the loading of prepaid payment instruments (PPI) with credit lines, category leader Slice, which had planned to raise USD 100 million in new funding, halted its fundraising plans. Both Paytm and Fino Payment Bank hold significant market share in the listed fintech space and continue to broaden their horizons through constant innovation and technological advancements. They believe that technology is one of the critical segments that can help the fintech space unlock a global revolution. 

Mutual Funds

As the year 2022 comes to a close, the mutual fund industry has piqued the interest of many investors. Although fund inflows have increased in almost all the categories of fund schemes, a few have seen a greater increase in the last 11 months than others. The consistent monthly increase in SIP flows has assisted the industry in increasing AUM to ₹ 39.88 lakh crore in 2022 from ₹ 27.72 lakh crore at the end of December 2021. As of October 2022, AUM managed by the mutual fund industry stood at ₹ 39.50 trillion with 139.1 million accounts. Inflows into mutual fund schemes in India via systematic investment plans (SIP) totalled ₹ 87,275 crore. By the end of December 2021, equity mutual funds had received a net inflow of ₹ 22.16 trillion. 

Contributions to mutual fund schemes via SIPs remained unaffected by market volatility in 2022, with inflows increasing to ₹ 1.5 lakh crore in 2022, a 31 per cent increase from the previous year due to increased retail participation. Going forward, SIP numbers are expected to remain strong in 2023 as investors recognise the value of regular investing through the route. From ₹ 11,305 crore in December 2021 to an all-time high of ₹ 13,573 crore in December 2022, the SIP book has grown steadily. This is also the third time in a row that monthly SIP contributions have surpassed ₹ 13,000 crore. More so, ever since the pandemic, there has been a spurt in the number of young professionals exhibiting a keen interest in investing in equities and mutual funds. 

Insurance

The Indian insurance market was valued at USD 131 billion as of FY22, having grown at a CAGR of 17 per cent over the previous two decades. It is expected to maintain its commendable growth trajectory in the coming years. In India, there are 58 insurance companies, including 34 non-life insurers. Over the last two decades, India’s insurance industry has grown at an impressive rate owing to increased private sector participation and improved distribution capabilities, as well as significant improvements in operational efficiencies. Private life insurers’ retail APE is expected to grow at a CAGR of more than 17 per cent from 2021-23 and new retail term premiums are expected to double in five years. Private non-life insurance is expected to grow 16 per cent in FY22 and 14 per cent in FY23. 

Standalone health insurers are expected to grow by over 25 per cent in FY22 due to the increased focus on healthcare. In 2023, the insurance industry must maintain momentum through significant transformations. In the coming years, technologyenabled customisation and transparency are expected to increase the demand for insurance in India’s second and third-tier cities. Bundling policy distribution has the potential to become a major source for recognising customer needs and increasing policy sales. Cloud computing, data and analytics, claim automation via telematics technology and applied artificial intelligence (AI) are some of the key technological disruptions that are expected to have a significant impact on the insurance industry in the near future, according to various industry reports.

Outlook

The Indian financial services industry has expanded dramatically in recent years. This upward trend is expected to continue. The private wealth management industry in India has enormous potential. By 2025, India is expected to have 6.11 lakh high net worth individuals (HNWIs). This will result in India becoming the world’s fourth-largest private wealth market by 2028. The insurance market in India is expected to reach USD 250 billion by 2025. This will also provide India with an additional USD 78 billion in life insurance premiums from 2020 to 2030. India’s economy is currently among the most dynamic in the world due to its thriving banking and insurance industries. 

The insurance industry has responded favourably to the loosening of foreign investment regulations with many corporations announcing plans to raise their interests in joint ventures with Indian firms. A number of joint venture agreements between major international insurance companies and regional firms may be struck throughout the ensuing quarters. India’s Unified Payments Interface (UPI) has worked in recent years to expand its global reach while revolutionising real-time payments. A recent Bain and Company report on ‘Buy Now, Pay Later’ (BNPL) points out, “For businesses in financial services, over the past few years it has been essential to have a fintech strategy. It is now also necessary for businesses that intersect payments, lending, and e-commerce to develop a BNPL strategy. 

The number of global open banking users is expected to grow at an average annual rate of nearly 50 per cent between 2020 and 2024 with the European market being the largest,” states a report by Statista. By 2025, the Association of Mutual Funds in India (AMFI) hopes to increase its AUM by five times to ₹ 95 lakh crore (USD 1.47 trillion) and increase its investor accounts by three times to 130 million. India’s fintech sector is expected to fuel this growth in a variety of segments. The mobile wallet industry in India is expected to grow at a compound annual growth rate (CAGR) of 150 per cent to reach USD 4.4 billion by 2022 with mobile wallet transactions reaching ₹ 32 trillion during the same time period.