Special Feature on Finance Sector

Finance Sector Contributes To Indian Economy’s Rapid Pace

The Indian financial sector is emerging to culminate into a robust, resilient and transparent system. Shreya Chaware sheds light on how the sector is expected to witness strong traction with Indian economy treading along the path of recovery. 

India's economic progress is largely dependent on the financial sector. The Indian economy is a crucial factor of stability in the global economy and a source of immense economic opportunity for the world. The changing dynamics of the Indian economy since liberalization in the early 1990s have had a deep impact on the Indian financial sector, which is one of the rapidly growing sectors of the Indian economy. The economy has seen rising private sector activity, including a deluge of foreign banks, insurance companies, mutual funds, venture capital and investment institutions. The various steps taken by the government and the regulators since liberalization to meet the challenges of the complex financial architecture have transformed the Indian financial sector into a strong, transparent and resilient system.

Several new instruments and products have been introduced. Existing sectors have been opened to new private players. The entry of new players has led to existing players upgrading their product offerings and distribution channels. Financial intermediaries too have gradually moved to internationally acceptable norms for income recognition, asset classification, provisioning and capital adequacy. This has given a strong impetus to the development and modernization of the financial sector. Going forward, the aim would be to achieve international standards in this area within the shortest possible time frame.

Market Size
The economy grew at 8.4 per cent for the second quarter of FY2021-22 on the backdrop of easing of Covid restrictions and increased pace of vaccination and, most importantly, on account of contraction to the low base of 7.4 per cent in the second quarter of FY2020-21. With this, the economy expanded 13.7 per cent during the first half of this fiscal year. But it contracted 4.4 per cent compared to the pre-Covid period. The GVA for financial services has contracted by 1 per cent on a 2-year CAGR. However, with increase in income and the growth of fintech, the financial sector is spreading to interior regions of the country. It is estimated that more than 2100 fintech are operating, and the higher accessibility to internet and mobile has strengthened India’s position as one of the largest digital markets.

Government Initiatives
On September 30, 2021, the Reserve Bank of India directed that the applicable average base rate to be charged by a non-banking financial company –microfinance institutions (NBFC-MFIs)–to their borrowers for the quarter beginning October 1, 2021, will be 7.95 per cent. For housing and real estate, the government support and incentives towards affordable housing for all stakeholders have given impetus to the housing finance sector. Some of these measures and incentives include liquidity schemes and refinance facilities for NBFCs, tax incentive for builders and ‘infrastructure’ status to affordable projects, tax deduction on principal and interest on housing loans to the home buyers.

The Factoring Regulation (Amendment) Bill in 2020 was passed enabling 9,000 NBFCs to participate in the factoring market. The bill also gives the central bank the authority to establish guidelines for improved oversight of the US$ 6 billion factoring sector. Prime Minister Narendra Modi launched e-RUPI, a person and purpose-specific digital payment solution, among other initiatives, to boost the financial services sector.

Financial Performance 
With the picking up of the economic activities and increase in the vaccination drives, disbursements for HFCs picked up significantly. HDFC Ltd, the market leader in the housing finance segment (14-15 per cent share), witnessed strong traction in loan growth. During H1FY22, individual loan approvals and disbursements grew by 67 per cent and 80 per cent, respectively, over the corresponding period of the previous year. The total loans sanctioned during six months ended September 30, 2021 amounted to ₹12,621 crore.

The loan books of vehicle finance companies witnessed divergent trends with Cholamandalam Investment Finance Co (CIFC) recording a 4 per cent y-o-y growth. The loan book for Mahindra Finance (MMFS) declined by 6 per cent y-o-y. Nippon Life India AMC is among the largest asset managers in India with an AUM size of ₹4.01 lakh crore. Overall, the AMC universe under review witnessed a net revenue growth of 28 per cent led due to strong growth in AUM. Stock broking firms saw a jump in revenues by 34 per cent in H1FY22 compared to H1FY21. Brokerage revenue growth was led by a gain in cash market share coupled with strong growth in volume on account of unprecedented new customer acquisitions.

Among the top 10 companies in the financial sector according to market capitalisation, the highest revenue growth was recorded by UTI Asset Management of 34.87 per cent, followed by Nippon Life India Asset Management and HDFC Asset Management. The highest change in PAT of 60.45 per cent was also recorded by UTI Asset Management Company, followed by Nippon Life Asset Management and Aavas Financiers. For UTI Asset Management, on a QoQ basis, revenue showed a growth of 11 per cent, whereas EBITDA and PAT recorded a growth of 18 per cent and 28 per cent, respectively. The UTI Group AUM increased 21 per cent on a YoY basis.

The following table depicts the comparison of half yearly performance of top 10 companies according to market capitalisation



Performance of finance stocks in equity markets

Bank stocks remain a puzzle in the Indian stock market. Investors consider that this sector is one of the only remaining islands of reasonable value in a market filled with stocks of high valuation. At the beginning of the Covid-19 pandemic, the sector was considered as the one to avoid, fearing that the drastic effect of the national lockdown on the economy would directly lead to a sharp rise in bad loans for lenders.

But lenders managed to emerge in a healthy way from the doomsday scenario. The support provided by the Reserve Bank of India helped, while cheap interest rates assisted some of the better banks to raise handsome capital last year. The sector has managed to keep stress at manageable levels while, at the same time, improve the health of its balance sheet.

According to Jyoti Roy, DVP-Equity Strategist, Angel One “We believe that the banking and NBFC space would be the biggest thematic bet for next year. Moreover, we expect credit growth to pick up next year which, along with reasonable valuations, should lead to a re-rating for the sector.”

Outlook
Central banks spooking some of the economies and causing some kind of market correction is currently the biggest risk envisaged. Although geopolitical risks are ever present, be it Russia, Ukraine, China or Taiwan, for three years the US markets have surprised the world with bumper returns and led the global markets forward. The economy should take a turn and inflow of private capex is expected towards the middle of next year. The domestic cyclicals appear to be the outperforming sectors, including banks, industrials, auto and real estate.

Moody’s Investors Service has revised the outlook for the Indian banking system to ‘stable’ from ‘negative’. Moody's expects India's economy to continue to recover in the next 12-18 months, with GDP growing 9.3 per cent in the fiscal year ending March 2022 and 7.9 per cent in the following year. This is expected to bring strong traction in financial services. India is expected to be the fourth largest private wealth market globally by 2028. The mutual fund industry, which is in a nascent stage, is also expected to grow at a CAGR of 12.7 per cent to ₹92 trillion by 2029-30.

The banks have witnessed a few unexpected events, which have led to correction in stocks just when they were ready to rise. The banks have dealt with most of their NPA issues and have opted for careful and conservative fresh lending. On the retail side, secured lending in the home finance is expected to augur well. Also, since banks are nibbling away market share from home finance and NBFC companies, they are expected to do well in 2022.