Post-Budget 2024: Charting the future of India's financial services sector
Post-Budget 2024: Charting the future of India's financial services sector
Significant disparities exist between deposits and credit growth, with credit expanding by 20% in FY24 while deposits grew by only 14%. This gap may compress Net Interest Margins (NIMs). Consumers are increasingly allocating their savings to non-bank avenues, impacting resultant deposit growth. Anticipated rate cuts by end of FY25 or early FY26 are expected to further pressure NIMs.
Banking Sector
The banking sector in India has recently shown significant improvements, marked by declining bad loans, enhanced profitability, and stronger capital positions. As of March 2024, bank deposits totalled INR 201tn, and gross advances stood at INR 161tn. The gross Non-Performing Assets (NPA) ratio hit a 12-year low of 2.8%.
The forward flows, i.e. defaults, are expected to marginally rise from current lows due to the recent growth in credit seasons. In addition, recoveries and upgrades are expected to moderate, which would lead to an increase in the quantum of gross non-performing advances compared to net reductions in FY24. However, the increase is expected to be low compared to overall book growth and hence the headline asset quality indicators are expected to maintain their positive trajectory, albeit at a moderate pace of improvement.
Significant disparities exist between deposits and credit growth, with credit expanding by 20% in FY24 while deposits grew by only 14%. This gap may compress Net Interest Margins (NIMs). Consumers are increasingly allocating their savings to non-bank avenues, impacting resultant deposit growth. Anticipated rate cuts by end of FY25 or early FY26 are expected to further pressure NIMs.
Additionally, the increase in risk weights on lending to retail unsecured and Non-Banking Financial Company (NBFC) segments has made banks cautious, which may potentially moderate credit flows to these sectors in FY25. The banking sector is also exposed to risks from geopolitical tensions, tightening global financial conditions, and capital outflows, thereby affecting export-oriented industries and loan repayments. Furthermore, cybersecurity threats are rising, with a 166% increase in frauds in FY24.
Budget 2024 and Policy Reforms
No new capital allocation was announced for public sector banks in the Budget, reflecting the improved health of these institutions. The Finance Minister did not address the proposed bad bank announced in FY22 budget speech; however, the government plans to establish an integrated tech platform for better outcomes under the IBC and set up additional tribunals for faster recovery of bad loans.
With an increased focus on Micro, Small, and Medium Enterprises (MSMEs), extending the credit guarantee scheme for manufacturing MSMEs with a self-financing guarantee fund, along with a new digital assessment model for MSME credit, will empower public sector banks to develop in-house capabilities for evaluating MSMEs based on their digital footprints. This is a win-win move for both MSMEs and lenders.
Financial support by way of interest subsidy for loans up to INR 10 lakh for higher domestic education and increased limits for micro credit under the Mudra Yojana have been announced, which will support the growth of MSME and education loan portfolios of lenders.
With the Finance Minister remaining silent on the privatisation drive in the current Budget speech, stakeholders anticipate a robust roadmap for planned divestment of public sector banks. Furthermore, the Finance Minister unveiled a financial sector vision and strategy document during the Budget speech to meet the financing needs of the economy and prepare the sector in terms of size, capacity and skills. Such a vision provides a clear, strategic direction for navigating the evolving financial services landscape and is viewed as a commendable initiative.
Non-Banking Financial Companies (NBFCs)
NBFCs have played a pivotal role in expanding credit access, especially to underserved segments, driven by digitalisation and innovative lending models. Gross NPAs have decreased to 4.0%, and the sector maintains a Capital-to-Risk (Weighted) Assets Ratio (CRAR) of 26.6% as of March 2024. The increase in risk weights in retail unsecured loans is expected to moderate the pace of advance growth by NBFCs, compounded by the increasing cost of funds as banks reduce their funding.
Microfinance Institutions (MFIs) were affected by elections and heat waves in Q1 FY24, resulting in higher defaults and credit costs. The quality of MFI portfolio may require close monitoring in the forthcoming quarters to assess if these issues are temporary or structural in nature.
Budget 2024 and Policy Reforms
The Budget allocated INR 10tn for the PM Awas Yojana to address housing needs, providing a potential boost for housing finance companies. However, loans under this scheme will require diligent monitoring to evaluate their quality and assess credit costs. Further, there was no mention in the Budget of reduction of the SARFAESI limit for NBFCs, similar to banks, to enhance the recovery of smaller loan defaults. Also, no specific measures to improve liquidity and reduce borrowing cost of NBFCs were announced.
FinTech
India’s fintech sector has experienced rapid growth, with an adoption rate of 87%, the highest globally. The digital lending market has grown at a Compound Annual Growth Rate (CAGR) of 39.5% over the past decade, while India has gained the third place in digital payments, only after the US and China. This growth can be attributed to various government initiatives and the successful implementation of UPI. The ongoing pilot implementation of Central Bank digital currency also presents an opportunity that could transform fintech operations in the coming years.
However, the sector faces certain challenges such as a lack of trust stemming from numerous instances of fraudulent UPI transactions, KYC leaks, and lending app fraud. This sunrise sector is now dealing with evolving regulatory framework. The agility of FinTech companies to quickly adapt and evolve with the regulatory development will be crucial for the continued success of the FinTech revolution.
Revenue model stability and profitability are critical for FinTechs operating in the payment space. Leveraging existing user bases and expanding market reach are key strategies. Neo-banks also face fierce competition from digital units of traditional banks.
Budget 2024 and Policy Reforms
In Budget 2024, the government abolished the Angel tax for all investor classes to stimulate start-ups and investments. The government's initiative to enhance digital payment infrastructure and promote financial inclusion will further boost the fintech sector. Digital lenders focused on MSMEs will leverage credit guarantee schemes to better serve smaller businesses.
Source:- BFSI Economic Times
Banking Sector
The banking sector in India has recently shown significant improvements, marked by declining bad loans, enhanced profitability, and stronger capital positions. As of March 2024, bank deposits totalled INR 201tn, and gross advances stood at INR 161tn. The gross Non-Performing Assets (NPA) ratio hit a 12-year low of 2.8%.
The forward flows, i.e. defaults, are expected to marginally rise from current lows due to the recent growth in credit seasons. In addition, recoveries and upgrades are expected to moderate, which would lead to an increase in the quantum of gross non-performing advances compared to net reductions in FY24. However, the increase is expected to be low compared to overall book growth and hence the headline asset quality indicators are expected to maintain their positive trajectory, albeit at a moderate pace of improvement.
Significant disparities exist between deposits and credit growth, with credit expanding by 20% in FY24 while deposits grew by only 14%. This gap may compress Net Interest Margins (NIMs). Consumers are increasingly allocating their savings to non-bank avenues, impacting resultant deposit growth. Anticipated rate cuts by end of FY25 or early FY26 are expected to further pressure NIMs.
Additionally, the increase in risk weights on lending to retail unsecured and Non-Banking Financial Company (NBFC) segments has made banks cautious, which may potentially moderate credit flows to these sectors in FY25. The banking sector is also exposed to risks from geopolitical tensions, tightening global financial conditions, and capital outflows, thereby affecting export-oriented industries and loan repayments. Furthermore, cybersecurity threats are rising, with a 166% increase in frauds in FY24.
Budget 2024 and Policy Reforms
No new capital allocation was announced for public sector banks in the Budget, reflecting the improved health of these institutions. The Finance Minister did not address the proposed bad bank announced in FY22 budget speech; however, the government plans to establish an integrated tech platform for better outcomes under the IBC and set up additional tribunals for faster recovery of bad loans.
With an increased focus on Micro, Small, and Medium Enterprises (MSMEs), extending the credit guarantee scheme for manufacturing MSMEs with a self-financing guarantee fund, along with a new digital assessment model for MSME credit, will empower public sector banks to develop in-house capabilities for evaluating MSMEs based on their digital footprints. This is a win-win move for both MSMEs and lenders.
Financial support by way of interest subsidy for loans up to INR 10 lakh for higher domestic education and increased limits for micro credit under the Mudra Yojana have been announced, which will support the growth of MSME and education loan portfolios of lenders.
With the Finance Minister remaining silent on the privatisation drive in the current Budget speech, stakeholders anticipate a robust roadmap for planned divestment of public sector banks. Furthermore, the Finance Minister unveiled a financial sector vision and strategy document during the Budget speech to meet the financing needs of the economy and prepare the sector in terms of size, capacity and skills. Such a vision provides a clear, strategic direction for navigating the evolving financial services landscape and is viewed as a commendable initiative.
Non-Banking Financial Companies (NBFCs)
NBFCs have played a pivotal role in expanding credit access, especially to underserved segments, driven by digitalisation and innovative lending models. Gross NPAs have decreased to 4.0%, and the sector maintains a Capital-to-Risk (Weighted) Assets Ratio (CRAR) of 26.6% as of March 2024. The increase in risk weights in retail unsecured loans is expected to moderate the pace of advance growth by NBFCs, compounded by the increasing cost of funds as banks reduce their funding.
Microfinance Institutions (MFIs) were affected by elections and heat waves in Q1 FY24, resulting in higher defaults and credit costs. The quality of MFI portfolio may require close monitoring in the forthcoming quarters to assess if these issues are temporary or structural in nature.
Budget 2024 and Policy Reforms
The Budget allocated INR 10tn for the PM Awas Yojana to address housing needs, providing a potential boost for housing finance companies. However, loans under this scheme will require diligent monitoring to evaluate their quality and assess credit costs. Further, there was no mention in the Budget of reduction of the SARFAESI limit for NBFCs, similar to banks, to enhance the recovery of smaller loan defaults. Also, no specific measures to improve liquidity and reduce borrowing cost of NBFCs were announced.
FinTech
India’s fintech sector has experienced rapid growth, with an adoption rate of 87%, the highest globally. The digital lending market has grown at a Compound Annual Growth Rate (CAGR) of 39.5% over the past decade, while India has gained the third place in digital payments, only after the US and China. This growth can be attributed to various government initiatives and the successful implementation of UPI. The ongoing pilot implementation of Central Bank digital currency also presents an opportunity that could transform fintech operations in the coming years.
However, the sector faces certain challenges such as a lack of trust stemming from numerous instances of fraudulent UPI transactions, KYC leaks, and lending app fraud. This sunrise sector is now dealing with evolving regulatory framework. The agility of FinTech companies to quickly adapt and evolve with the regulatory development will be crucial for the continued success of the FinTech revolution.
Revenue model stability and profitability are critical for FinTechs operating in the payment space. Leveraging existing user bases and expanding market reach are key strategies. Neo-banks also face fierce competition from digital units of traditional banks.
Budget 2024 and Policy Reforms
In Budget 2024, the government abolished the Angel tax for all investor classes to stimulate start-ups and investments. The government's initiative to enhance digital payment infrastructure and promote financial inclusion will further boost the fintech sector. Digital lenders focused on MSMEs will leverage credit guarantee schemes to better serve smaller businesses.
Source:- BFSI Economic Times