Trade Analytics
Financial Services
Investment corpus in India's pension sector could cross US$ 1 trillion by 2025.

Financial Services in India

Latest update: March, 2017

Asset management: AUMs have more than doubled since FY07

  • The asset management industry in India is among the fastest growing in the world
  • Total AUM of the mutual fund industry clocked a CAGR of 12.4 per cent over FY07–16.
  • As of FY16, 42 asset management companies were operating in the country.
  • As of March 2016, total AUM of mutual fund industry was recorded at US$ 206.8 billion.

 

Last Updated: March, 2017

SECTORAL REPORT | February, 2017

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.

Market Size

Mergers and acquisition (M&A) activity in India rose 125 per cent year-on-year to US$ 32.5 billion across 445 deals during January-September 2016.** Domestic M&A deal value stood at US$ 7.3 billion across 137 deals during July-September 2016, which is around 65 per cent of the total M&A deal value of US$ 11.3 billion during the quarter. ^

Private equity (PE) investments in real estate sector in India have increased 22 per cent in the first nine months of 2016 to reach Rs 283 billion (US$ 4.24 billion), as compared to the same period in 20151

Funds mobilised by Indian companies through non-convertible debentures (NCDs) increased sixteen-fold to Rs 23,901.4 crore (US$ 3.58 billion) during April-September 2016 led by growing investor appetite.@

The assets under management (AUM) of the mutual fund (MF) industry grew 45 per cent to Rs 17.89 lakh crore (US$ 268.35 billion) during March 2016 to February 2017.@@ Mutual fund asset base in India increased by Rs 3.71 trillion (US$ 55.65 billion) to reach a total corpus of around Rs 17 trillion (US$ 255 billion) in 2016, which is the highest growth recorded in the last seven years.

The Indian life insurance industry has begun to recover and is likely to report 12-15 per cent growth in FY 2016-17.! India’s life insurance sector is the biggest in the world with about 360 million policies, which are expected to increase at a Compounded Annual Growth Rate (CAGR) of 12-15 per cent over the next five years. The insurance industry is planning to hike penetration levels to five per cent by 2020, and could top the US$ 1 trillion mark in the next seven years. The total market size of India's insurance sector is projected to touch US$ 350-400 billion by 2020.

Investment corpus in India’s pension sector is expected to cross US$ 1 trillion by 2025, following the passage of the Pension Fund Regulatory and Development Authority (PFRDA) Act 2013.

In 2016, 2.4 million new demat accounts were opened by Indians, the highest number of account openings since 2008, led by higher number of initial public offerings (IPOs) and greater interest in mutual fund investments. SBI, the second largest issuer of credit cards in India, has reported issuance of 115,000 new cards in December 2016, post demonetisation, taking its total card issuance to 4.75 million.

Prime Minister of India, Mr Narendra Modi has stated that the BHIM (Bharat Interface for Money) mobile application reached the mark of 10 million downloads indicating the widespread acceptance of the app. India's digital payments industry is expected to grow by 10 times to reach US$ 500 billion by 2020 and contribute 15 per cent of Gross Domestic Product (GDP).$

Investments/Developments

  • The Taiwan Futures Exchange (TAIFEX) has launched the TAIFEX Nifty 50, a new Taiwan dollar denominated futures contract that will track the National Stock Exchange's (NSE) Nifty 50 index, thereby providing international investors with more efficient access to the Indian capital market.
  • Warburg Pincus LLC, the US-based private equity firm, plans to invest around US$ 75 million in series C round of funding to buy a significant stake in Capital Float, an online credit platform.
  • Asset management company Rising Straits Capital plans to raise US$ 100 million to capitalise its real estate-focused non-banking financial company (NBFC) named Rising Straits Finance Co. Pvt. Ltd, which is expected to start lending from 2017 to regular residental and office projects, and also to logistics, hospitality and healthcare sectors.
  • IFMR Capital, an NBFC that works in the area of financial inclusion, has raised US$ 25 million from London-based venture capital fund Eight Roads Ventures, which will be used to grow its existing business and explore other opportunities across new products and sectors.
  • The first ever rupee-denominated bond in the world by an Indian company, termed as masala bond, has been listed on the London stock exchange by the Housing Development Finance Corporation Limited (HDFC Ltd). The issue raised US$ 450 million, with a maturity of three years and an annual yield of 8.33 per cent.
  • IFMR Capital, a debt finance provider, has raised US$ 17 million from British banking and financial services firm Standard Chartered Private Equity (SCPE), which will be used for product innovation and to increase its client base and sectors that it caters to.
  • US-based private equity (PE) firm Advent International has acquired a minority stake of 40 per cent in ASK Group, a leading investment and wealth management company, in a deal worth US$ 130 million.
  • Avendus Capital plans to start its structured finance business with a dedicated fund of size Rs 500 crore (US$ 73 million), which will be primarily raised from domestic investors, and will aim for investments in growth companies, mid-market companies and opportunities to provide structured debt or private financing.
  • Baring Private Equity Asia (BPEA) is raising a new India-dedicated credit fund of Rs 500 crore (US$ 75 million) with an option of retaining extra money collected than initially planned up to Rs 250 crore (US$ 37.5 million). BPEA also plans to raise a US$ 500 million new offshore credit fund.
  • Fino Paytech, a technology solution provider, plans to launch its payment bank operations soon to provide basic banking services through 400 branches across 30 cities located in Maharashtra, Madhya Pradesh, Uttar Pradesh and Bihar.
  • Payism Technologies India Pvt. Ltd, a cash and cashless transactions facilitator, plans to raise approximately US$ 25 million in growth equity capital for expansion purpose.
  • Paytm, an online payments firm, plans to invest Rs 600 crore (US$ 90 million) over the next 10 months to expand its QR code-based payment network, aiming to add 10 million merchants across 650 districts by December 2017.
  • True North, a private equity firm, plans to acquire a majority stake in Home First Finance Co. India Pvt. Ltd (HFFC), a private housing finance company, for US$ 100 million, which will be utilised for geographic expansion and customer acquisition in affordable housing segment.
  • Institute for Financial Management and Research (IFMR) Investment Managers Pvt. Ltd has launched two credit funds named IFMR FImpact Long Term Credit Fund and IFMR FImpact Medium Term Opportunities Fund, which focuses on investing in the financial inclusion space by aiming to raise Rs 850 crore (US$ 127.50 million) through these funds.
  • Paytm’s e-commerce unit raised US$ 200 million in a funding round led by Chinese e-commerce giant, Alibaba and existing investor, SAIF Partners, to become the latest Indian unlisted company to be valued at over a billion dollars.
  • Indiabulls Housing Finance has raised over Rs 1,300 crore (US$ 195 million) by selling masala bonds to foreign investors, which would be used partly for its affordable housing segment.
  • Kotak Mahindra Bank Limited has bought 19.9 per cent stake in Airtel M Commerce Services Limited (AMSL) for Rs 98.38 crore (US$ 14.75 million) to set up a payments bank. AMSL provides semi-closed prepaid instrument and offers services under the ‘Airtel Money’ brand name.
  • Tata Capital, the financial services arm of Tata Group, plans to raise Rs 2,000 crore (US$ 300 million) for its real estate fund, from State General Reserve Fund (SGRF), the sovereign wealth fund of Oman.
  • Nippon Life Insurance, Japan’s second largest life insurance company, has signed definitive agreements to invest Rs 2,265 crore (US$ 339.75 million) in order to increase its stake in Reliance Life Insurance from 26 per cent to 49 per cent.

Government Initiatives

  • In the Union Budget 2017-18, the Government of India has announced a few key reforms like abolishment of Foreign Investment Promotion Board in 2017-18, Introduce bill for curbing illicit deposit schemes, Establish a Computer Emergency Response Team for financial sector (CERT-Fin) and set aside Rs 10,000 crore (US$ 1.5 billion) towards recapitalisation of banks.
  • SEBI plans to tighten the norms governing various market participants in order to strengthen scrutiny, improve transparency and mitigate liquidity risks from algorithmic trading.
  • 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 Prime Minister of India has launched the Micro Unit Development and Refinance Agency (MUDRA) to fund and promote Microfinance Institutions (MFIs), which would in turn provide loans to small and vulnerable sections of the business community. The lending target has been fixed at Rs 244,000 crore (US$ 36.46 billion) for 2017-18.
  • Government of India’s ‘Jan Dhan’ initiative for financial inclusion is gaining momentum. Under Pradhan Mantri Jan Dhan Yojna (PMJDY), 217 million accounts# have been opened and 174.6 million RuPay debit cards have been issued. Government of India aims to extend insurance, pension and credit facilities to those excluded from these benefits under the Pradhan Mantri Jan Dhan Yojana (PMJDY). The Union Cabinet Minister has also approved the Pradhan Mantri Suraksha Bima Yojana which will provide affordable personal accident and life cover to a vast population.
  • The Department of Industrial Policy and Promotion (DIPP) has allowed 100 per cent Foreign Direct Investment (FDI) in asset reconstruction companies (ARC) under automatic route, which will help to tackle the issue of declining asset quality of banks.

Road Ahead

India is today one of the most vibrant global economies, on the back of robust banking and insurance sectors. The country is projected to become the fifth largest banking sector globally by 2020##. The report also expects bank credit to grow at a Compound Annual Growth Rate (CAGR) of 17 per cent in the medium term leading to better credit penetration. Life Insurance Council, the industry body of life insurers in the country also projects a CAGR of 12–15 per cent over the next few years for the financial services segment.

Also, 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.

Exchange Rate Used: INR 1 = US$ 0.015 as on February 9, 2017

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

Note: ** - As per a report by KPMG,^ - As per data from Ernst and Young, 1 - , As per the report Private Equity investments in Real Estate (PERE) by Cushman & Wakefield, 2 - As per the data from Association of Mutual Funds in India (AMFI), ! – As per a paper by ICRA, # - As of April 27, 2016, ## - , as per a joint report by KPMG-Confederation of Indian Industry (CII), * - As of September 22, 2016, $ - As per a study by Google (Alphabet Inc.) and Boston Consulting Group, July 2016, @ - According to data from SEBI, @@ - according to the Association of Mutual Funds in India (AMFI).

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

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