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Financial Services in India

March, 2018

Introduction

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 per cent of the total assets held by the financial system.

The Government of India has introduced several reforms to liberalise, 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). With a combined push by both government and private sector, India is undoubtedly one of the world's most vibrant capital markets. In 2017,a new portal named 'Udyami Mitra' has been launched by the Small Industries Development Bank of India (SIDBI) with the aim of improving credit availability to Micro, Small and Medium Enterprises' (MSMEs) in the country. India has scored a perfect 10 in protecting shareholders' rights on the back of reforms implemented by Securities and Exchange Board of India (SEBI).

Market Size

The Mutual Fund (MF) industry in India has seen rapid growth in Assets Under Management (AUM). Total AUM of the industry increased 40 per cent year-on-year to hit a record Rs 23 lakh crore (US$ 358.78 billion) at the end of November 2017.At the same time the number of Mutual fund (MF) equity portfolios reached a record high of 46.63 million, of which 7.6 million portfolios were added in 2017 till November.

On account of rise in investments in the Mutual Funds and other financial instruments, the revenues of the brokerage industry in India are forecasted to grow by 15-20 per cent to reach Rs 18,000-19,000 crore (US$ 2.80-2.96 billion) in FY2017-18, backed by healthy volumes and a rise in the share of the cash segment.

Another crucial component of India’s financial industry is the insurance industry. The insurance industry has been expanding at a fast pace. The total first year premium of life insurance companies grew 18.9 per cent year-on-year to reach US$ 18.44 billion during April-November 2017.

Along with the secondary market, the market for Initial Public Offers (IPOs) has also witnessed rapid expansion. A total of 153 initial public offers (IPOs) were issued in the Indian stock markets in 2017, which raised a total of US$ 11.6 billion^.

Over the past few years India has witnessed a huge increase in Mergers and Acquisition (M&A) activity. The total value of M&A in India rose 53.3 per cent year-on-year to US$ 77.6 billion in 2017 from US$ 50.6 billion in the preceding year.

Furthermore, India’s leading bourse Bombay Stock Exchange (BSE) will set up a joint venture with Ebix Inc to build a robust insurance distribution network in the country through a new distribution exchange platform.

Investments/Developments

  • Global payments solution giant Mastercard has launched its first technology lab in Pune, which will enable India to move towards digital economy and financial inclusion.
  • Four metro cities of Delhi, Mumbai, Bangalore and Chennai can reap benefits of US$ 7.2 billion annually by increasing payments through digital means##.
  • BankBazaar, a financial marketplace start-up in India, raised US$ 30 million in a funding round led by Experian Plc, a credit rating agency based in UK, taking the company's total funding to US$ 110 million.
  • Private equity (PE) investments in India increased 59 per cent to US$ 24.4 billion in 2017, with average deal size of US$ 42.8 million, according to data provided by Venture Intelligence.

Government Initiatives

  • The Ministry of Finance has launched the Operation Clean Money Portal, in an attempt to create a tax compliant society as well as a transparent tax administration.
  • The Government of India is likely to allow 100 per cent foreign direct investment (FDI) in cash and ATM management companies, since they are not required to comply with the Private Securities Agencies Regulations Act (PSARA).
  • Securities Exchange Board of India (SEBI) has permitted the security exchanges to launch options contracts in the commodity market, which would provide a new cost effective hedging tool to the farmers and others market participants. 
  • The Securities and Exchange Board of India (SEBI) has allowed exchanges in India to operate in equity and commodity segments simultaneously, starting from October 2018.
  • SEBI has relaxed norms for registered foreign portfolio investors (FPIs) in India, allowing them to operate through the International Financial Services Centre (IFSC) without undergoing any additional documentation or prior approval process.
  • The RBI has introduced trading in interest rate options (IRO), effective from January 31, 2017, which will provide another avenue to market participants to hedge and speculate on interest rate risk.
  • SEBI plans to allow investors to make mutual funds transactions worth up to Rs 50,000 (US$ 750) a month through digital wallets, as part of its efforts to digitise the distribution processes for all financial products. It also plans to allow immediate credit to customer’s bank accounts on liquid mutual funds redemption to attract retail customers as well as boost inflows.
  • Mr Ravi Shankar Prasad, Union Minister of Law & Justice and Information Technology, has launched a free Doordarshan DTH channel called DigiShala, which will help people understand the use of unified payments interface (UPI), USSD, aadhaar-enabled payments system, electronic wallets, debit and credit cards, thereby promoting various modes of digital payments.
  • The Government of India has relaxed norms for small merchants with a turnover of up to Rs 2 crore (US$ 300,000), allowing them to pay 6 per cent of deemed profit in tax instead of 8 per cent of total turnover or gross receipts received through banking channels or digital means for FY 2016-17, in a bid to encourage cashless transactions in the country.
  • The lending target has been fixed at Rs 244,000 crore (US$ 36.46 billion) for 2017-18.
  • The Government of India launched the 'Bharat 22' exchange traded fund (ETF), which will be managed by ICICI Prudential Mutual Fund, and is looking to raise Rs 8,000 crore (US$ 1.22 billion) initially.
  • The subscriber base under the Atal Pension Yojana (APY) scheme reached 80 lakh. Of the total subscribers 26.54 per cent are in the age group 26 to 30 years, 24.13 per cent are in the age group of 21 to 25 years, 23.52 per cent are in the age group of 31 to 35 years and 10.87 percent are in the age group of 18 to 20 years.

Road Ahead

  • India is today 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. Over the coming quarters there could be a series of joint venture deals between global insurance giants and local players.
  • The Association of Mutual Funds in India (AMFI) is targeting nearly five fold growth in assets under management (AUM) to Rs 95 lakh crore (US$ 1.47 trillion) and a more than three times growth in investor accounts to 130 million by 2025.
  • India's mobile wallet industry is estimated to grow at a Compound Annual Growth Rate (CAGR) of 150 per cent to reach US$ 4.4 billion by 2022 while mobile wallet transactions to touch Rs 32 trillion (USD $ 492.6 billion) by 2022.

Exchange Rate Used: INR 1 = US$ 0.015 as of January 4, 2018.

References: Media Reports, Press Releases, IRDAI, General Insurance Council, Reserve Bank of India, Union Budget 2017-18

Notes - $# - ICRA (Investment Information and Credit Rating Agency of India Limited), &* - Grant Thronton (India), ^- As per a report by EY, ## - As per a report by global financial services major Visa, @@ according to the report published in the World Bank's Ease of Doing Business 2018