India is uniquely positioned today in the financial services space, a sector that straddles all sections of the economy, despite various challenges we have faced post the Lehman Era, both domestically and internationally.
In contrast to the developed markets, we have seen significant public spend at the bottom of the pyramid, rise in income levels, greater graduating middle class and unparralled consumer demand side robustness which continues.
There are accompanying challenges as well, significant being, the slowing of equity capital both in capital markets and in private domain, as well as strategic foreign direct investment primarily driven by improving market conditions in US, complex policy, political and governance issues in India.
Combination of the above has created inflationary trends and a higher interest scenario also resulting in a depreciating rupee. Given the outlined demand and challenges, we have seen significant demand for capital being serviced by the credit markets, unlike the pre Lehman era which had a significant equity infusion. Credit in India is indeed, emerging as one of the most significant opportunity stories globally, given credit from banks and NBFC’s has grown at a 5 year CAGR of 17.78%. This is in absence of big ticket infra financing which if addressed will make the opportunity even larger.
New banking licenses (25 applicants), emergence of the NBFC sector (multiple Billion $ platforms eg. Mahindra Finance, Indostar, Religare, L&T Finance), focused financing platforms (housing/affordable housing, automotive, micro finance, gold finance) are some of the areas where significant double digit growth is being or will be witnessed. PEs have also invested ~$5.7bn in last 5 years and $770 mn year till date in these areas. There are challenges on credit as well on infrastructure side which we believe at this point is more delay than write offs.
Supporting ecosystem eg. Cash and payment services (ATM’s, credit cards, mobile banking, cash management) on back of unparalled mobile penetration and unique identity no. program will be a significant opportunity as greater integration of middle and lower classes emerges very rapidly into organized financial inclusion. Recent announcement of Hitachi buying Prism payments (leader in ATM management) is testimony as is investment by Prosegur and Blackstone in cash management.
We are also at a unique crossroad, where political clarity, improving governance, removing infrastructure roadblocks, galvanizing equity capital can leapfrog the opportunity significantly on equity side, and any worsening can have eventual consumer demand impact and eventually in the credit markets as well.
Overall, USD 1.83 trillion economy, 1.2 billion people, 80% connected on mobile 400 mn of which will have internet access in next couple of years, over 300 mn in middle class with strong financial needs is a market one cannot ignore, and if played right there are opportunities that can give the 10X multiplier on investment as it has in the last decade in some cases. In short, short term bearishness that predominates on India we believe is also the right time to play long especially in financial services sector.