Changing financial landscape in India
The landscape of Indian financial sector is changing rapidly with issuance of new and innovative banking licenses, Evolving digital technologies in payments value chain, financial inclusion of large untapped (rural) market, exponential growth in MSME lending. There is no doubt that the financial industry is the main fuel for economic vehicle. Geographic and demographic nature of Indian financial industry makes it very attractive with huge potential to grow in the coming years.
Let’s look at the current situation of the industry:
The banking industry is witnessing sudden rise in competition from all the corners. Indian banking industry is dominated by public sector banks with more than 70% of the nation banking is done through these players. Public sector banks have been poor in services quality, ease of banking, and technology adoption which made them to lose their market share to efficient private players. The current problem of high NPA’s further put them back in the current financial race.
Sudden Rise in Competition:
We are seeing a new wave of competition in Indian banking and this will intensify as the turf is being disrupted. Between 1994 and 2014, 12 new banks were born, but not all of them have survived. In the last two years , two more have made an appearance with universal baking licenses(IDFC Bank and Bandhan), 11 Payment banks and 10 small finance banks (SFB) have also entering into the banking system. The payments banks are expected to eat into the fee income of regular banks by offering smart payments channels using mobile telephony, while small banks will fight pitched battles with big banks in different geographies for deposits. The entry of these new players will create competition and make existing players to revise their business models. The quest for survival for players will hopefully spur innovation which in turn will lead to solutions that will enable quicker, cheaper, and more effective deployment of financial services and products.
Digital Dynamics in Payments Value Chain:
“If you look at for our bank, more than 60% of the transactions are now done only on mobile and internet. It is no longer electronic channels but it is just these two digital channels that see more than 60% of the transactions. In fact at the branches, it is now less than 5% or 6%. So that is the change that is happening.” – Chanda Kochhar MD & CEO ICICI BANK
Due to ease of access and time saving, retail baking is witnessing fast change from brick & mortar (branch) banking to Digital (mobile and internet) banking. The digital channels are challenging the traditional banking business and the rise in competition from Fintechs and Payment banks are pushing existing players to reconsider their business models. With the slow adoption of technology, PSB’s are far behind the many players in this digital race. According UBS survey report, 50% of respondents used mobile apps for banking transactions and 20% are mulling to change their primary bank, and for 20% the quality of mobile banking offerings is a key factor. Technology also makes new players to scale up fast in gaining customers. Paytm which is soon going to start its payment bank has 100million users which will be easy for it to convert them to its banking channel. Its technology, ease of doing transactions, and bunch of financial services under one umbrella will make it attractive for customers.
Shifting focus of lending market:
In lending business, banks have restricted themselves to large and medium enterprises where the ticket size is very large. While banks with their presence on high streets and their network of ATMs make it appear that they are leading the charge in retail lending, NBFCs have emerged as strong players in this space. With retail loans of $92 billion, top 12 NBFCs are just 5 per cent behind the corresponding retail books of the top five private sector banks. In fact, in segments like automobile loans and loans against shares, NBFCs have higher market share than banks.
SME & Housing:
With one estimate suggesting that over 50 per cent of micro, small and medium enterprises (MSMEs) not having access to formal credit, the need statement cannot be overstated. The MSME segment is neglected by Banks which presently dominated by NBFC’s. Non-banking finance companies (NBFCs) with localized presence and domain knowledge have started to look at small business finance market as an opportunity. Presently, the small business finance market comprises of NBFC-MFIs, large and old NBFCs along with new NBFCs.
With Other than the opportunity in SME financing, increased penetration of housing finance will certainly drive double-digit growth over the next decade. India’s housing finance segment continues to show massive potential for growth and housing finance companies with 40 per cent share are clearly leading the way here. Further, as newer customer needs emerge from a digitally-savvy customer segment, NBFCs could potentially open up new avenues for growth.
Microfinance – The present hot topic:
After years of subdued growth, the Indian microfinance (MFI) industry expanded more than 60% to Rs54,329 crore in 2015-16 compared to the previous year. The top 10 MFIs classified as non-banking financial companies (NBFCs) accounted for about 80% of the total gross loan value. They include Jana Lakshmi Financial Services Ltd, Ujjivan Financial Services Ltd and SKS Microfinance Ltd. 94% of the total loans taken from MFIs are for income generating activities, dominated by agriculture and animal husbandry.
Bandhan, accounting for 25 per cent portfolio of NBFC-MFI industry converted into a Bank in August 2015, and 8 NBFC-MFIs accounting for another 50 per cent portfolio of the sector are in the process of transforming into SFBs within the next 3 to 6 months. Even major banks are acquiring micro finance players to tap the large untapped potential from this segment.
Recent headlines from the industry
While Shares of several banks have been hit due to rising stress in corporate loan book. On the other hand, NBFCs, which are not into project financing, have seen their shares outperform. The share prices of Micro Finance companies have been more than doubled from their February lows. We believe that this is an inflection for the growth that is going to come from large untapped market, MSME Lending and from housing finance. The evolving digital technologies will make this growth very easier compared to previous years.