Sector Analysis:

Financial Services

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Table of Contents:

Sr. No Topic Page No.

1. Financial Services Sector in India 3-4

2. Sector Analysis (Key pointers) 5-6

3. Current market Compositions & Major Players 7-8

4. Recent Industry News 9-10

5. Growth Drivers in Future 11

6. Major Coverages in the last year 12

7. References 13

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Financial Services Sector in India:
The Indian Financial Services sector is comprised broadly of the Non-Banking Financial Services
(NBFCs), Capital markets and the Insurance Sector.

These can be further classified as under:

Capital
NBFCs Markets
Insurance

Asset Finance Asset

Life Insurance
Companies Management

Investment
Broking General Insurance
Companies

Investment
Loan Management Banking and
Companies Wealth
Management

Growth of the Indian Financial Services:

The Financial Services sectors has seen a massive growth over the last decade in India. The Asset
Management industry in the country is amongst the fastest growing in the world. To take a look at
the growth, we can classify the various segments as under:

a) Asset Management (Mutual Funds):

As at August 2019, the Mutual Fund Asset Under Management stood at Rs. 25.74 Lakh
Crores (USD 364.42 Billion). This in an increase of a near 200% as compared to the AUMs in
2008, signifying a growth spurt over the last decade.
The Systematic Investment Plans (SIPs) contributed to USD 13.26 Billion in form of inflows,
signifying a growing retail base, reaching beyond the metro and Tier 1 cities as well.

Assets under Management (in

USD Billions)
400

300

200

100

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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b) Capital Markets:
The Indian Stock Markets, characterized by the S&P Sensex and the Nifty50, rose by 17% and
15% respectively in FY19.
Over the last 25 years, the number of Listed Companies on the Indian Stock Exchanges has
grown from 135 as at FY1995 to 1942 as at FY2019 (National Stock Exchange).

c) Wealth Management:
The High Net worth households in the Indian Economy are expected to grow at a lightning
pace, currently growing at a CAGR of 21.5% till 2019. India is expected to be the 4th Largest
Private Wealth Market globally by 2028. Services with a high demand in this segment include
Advisory Asset Management and Tax Planning.

d) Insurance:
The total Life and Non-Life Premiums for the Insurance Companies stood at USD 67.12
Billion and USD 23.27 Billion during FY19. The Life and Non-Life segments have been growing
at a CAGR of 4.95% and 7.27% since the start of the Decade.

e) Non-Banking Financial Companies:

NBFCs are rapidly gaining prominence in the Indian Financial services space. The Companies
stand to finance over 80% of the Equipment leasing and hiring activities in the country. The
Public deposits in the NBFCs have increased at a CAGR of 36.86% over the last 10 years,
totalling to 5.86%. The NBFCs accounted for 26.6% of share in the total Domestic Credits in
Fy19.

Public Deposits in NBFCs (USD Billions)

8
6
4
2
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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Sector Analysis (Key Pointers):
Policies and Regulations:
The Government has ensured various policy regulations to strengthen the Financial Services
Sector in India.
Capital Markets: SEBI has proposed direct overseas listing of Indian Companies in December
2018, and other regulatory changes providing the Indian markets with a broader investor base.
The Corporate Tax rate cuts and the abolishment of additional surcharge on ivestments by FPIs
in 2019 are steps that would bolster the Indian Capital Markets.

NBFCs: As mentioned in the Budget 2019, the Government had agreed to provide a one time 6
months partial guarantee to Public Sector Banks for the first loss upto 10% (Maximum Rs. 1 Lac
Crores). Prior to this move, the RBI had announced that thte Banks would be able to assign
differential weights to their exposures to various NBFCs, as against the prevalent practice of
assigning a 100% risk weightage. This would free up more capital for lending by the Banks,
which could be a potential source of funding to NBFCs, and would provide some respite from the
prevalent NBFC crises . Also, in October 2019, the Reserve Bank of India decided to create a
separate sub category of NBFCs for Micro Finance Institutions (NBFCs – MFIs). Theses insitutions
would be targetting the bottom pyramid of consumers in sanctioning credit.

Insurance: The Government has been hinting at opening the Insurance Sector for FDIs from 49%
to 76% in order to attract further investments in the sector. The Government has already
approved 100% FDIs for Insurance intermediaries. The Governement has also been mulling for
reducing the Net Owned Funds requirements for Reinsurers from Rs. 1000 Cr to Rs. 500 Cr.

Economic Factors:
The economic conditions of the country have a direct impact on the Financial Sector. A reduction
in Growth rate from 7.4% to 6% in FY19, and a projected decline to 5.4% has led to a derease in
the Credit requirements in the economy. The impact of macroeconomic factors on the Monetory
Policy of the country, such as the recent Repo Rate cuts by RBI will lead to ease of obtaining
credit for the NBFC sector (from the Banks).
Also, the interest rate and exchange rate factors prove pivotal in increasing or blocking FIIs in
the country, whch form a bulk of Mutual Fund and Stock Market investments. Retail sentiment
backed by a loss of emplyment opportunities and lack of growth has been lukewarm towards
investments in the recent past.

Sociocultural Factors:
By 2011, India’s Personal Wealth is forecasted to be at USD 5 Trillion, with a CAGR of 13% from
2017. India’s Gross Savings Rate as a percentage of GDP has remained above 30% for the last
10 years. The Gross Investments as a percentage of GDP have increased as compared to the last
few years (31.5% as at FY19), though the same are low compared to the start of the decade.
However, a growing middle class, with a lot of first time owners, is touted as a positive sign for
the NBFCs in the near future. The Wealth Management sector is poised to grow on the back of
the rising HNI and UHNWI population of the country (an increase of 118% over the last 5 years,
poised to increase 37% over the next 5 years).

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Technological Factors:
The FinTech revolution has been disrupting the Financial Sector services since the last 5 years. A
changing customer demographic more accustomed to digital channels, with a need for better
services and unmet demands has led to emergence of a Vibrant FinTech sector, also backed by
Government policies and regulations. Ranging from Digital payments to the intrusion of AI to the
Credit Analysis procedure to Chat bots taking over the Wealth management Sector, the Financial
Services segment is highly prone to the rapid technological advances.

Following are a few areas witnessing major changes owing to technological disruptions:

a) Digital Payments:
Payments have been at the forefront of India’s digital revolution, with Digital transasction
Volumes touching USD 3. Trillion in 2018. Open Banking is one of the trends catching up
prominence at world level, with the multinationals poised to bring it to India soon. Increased
use of Alternative Payment Channels such as Virtual Cards, Instant Issuance, All in one POS
etc are being leveraged.
b) Alternative Lending:
Technology driven alternative lenders are disrupting the traditional lending systems (NBFCs),
employing advanced technologies such as Artificial Intelligence and Machine Learning to
optimise their customer acquisition process, improve Credit Underwriting techniques and
adopt sophisticated Risk Management Solutions. Eg. P2P Lending, Invoice Financing, Mobile
Lending, Digital Mortgage etc.
c) InsurTech:
It refers to the practise of using technology based innovations to drive disruptions across the
insurance value chain. The space has nascent startups operating across facets such as Lead
Management, Underwriting, Sales, Claims and Renewals etc.
d) WealthTech:
These players employ advanced analytics to offer digital solutions to transform traditional
wealth management and investment banking services. The improved usagee of Big data and
AI/ML techniques has helped in evaluating investent opportunities, optimising portfolios,
mitigating risks and improving decision making.

Legal Factors:
The introduction of the Insolvency and Bankruptcy Code has instilled a sense of calm among the
Indian Invertors, when it comes to investing in riskier assets. Also, routine measures adopted by
the RBI/SEBI with regards to the compliance and KYC norms to be adopted by various players in
the segment continue to have influence over the Indian Financial Services Sector.

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Current Market Composition and Major Players:
a) Asset Management Companies:
Following are the leading AMCs with the highest AUMs as at March 2019:

AMCs - AUM (Proportion of Top 5)

Reliance Mutual HDFC Mutual
Fund Fund
16% 24%

Birla Sunlife
Mutual Fund
17%

ICICI Prudential
Mutual Fund
SBI Mutual Fund 23%
20%
HDFC Mutual Fund ICICI Prudential Mutual Fund
SBI Mutual Fund Birla Sunlife Mutual Fund
Reliance Mutual Fund

b) Non Banking Financial Services:

Following are the leading NBFCs with the highest market cap as at November 2019:

NBFCs - Market Cap (Proportion of Top 5)

9%
10%

12%
55%
14%

Bajaj Finance Reliance Mutual Fund

Power Finance Corporation Sriram Transport Corporation
Mahindra and Mahindra Finance Ltd

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c) Insurance Companies:
Following are the leading Life Insurance Companies (as per Claims settled till date):

Life Insurance Companies - Claims

22% 16%

19%
27%
16%

ICICI Prudential Life Insurance SBI Life Insurance

HDFC Standard Life Insurance Bajaj Allianz Life Insurance
Reliance Nippon Life Insurance

Follwing are the leading General Insurance Companies ( As per the Claims Ratio):

General Insurance Companies

140.00%

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%
National United India New India The Oriental Reliance
Insurance Assurance Assurance Insurance Co General
Company Insurance

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Recent Industry News:
NBFCs:
• In September 2019, The Reserve Bank of India decided to cap the Banks’ exposures to a
single NBFC to upto a maximum 20% of the Bank’s Eligible Capital base. The same was
brought in line with the Bank’s maximum exposure to any single counterparty of 20%.
• The Securitization of NBFC Loans has picked up pace in the second half of 2019. One of
the major reasons for the same is drying up of other sourcces of funds available to the
NBFCs post the NBFC Crisis. The NBFCs and HFCs have raised Rs. 2.36 Lakh Crore in the
last 1 year upto September 2019 by selling their loans in the open market or through
securitization. The NBFCs continue to rely on raising funds through securitization in
order to constantly balance the Asset Liability Mismatch.
However, Risk aversion amongst state run lenders and the fact that many of them are
under Promt Corrective Action (PCA) of the RBI could reduce the pool of resources that
banks would make available to buy these NBFC Assets.
• The SEBI had eased the norms for buyback of shares by listed companies, specially
those having subsidiaries in Housing Finance and NBFC Segments. The buyback offer
cannot exceed 25% of the aggregate capital of the paid up capital and free reserves of
the company, however, the change in provision wrt the Companies Act are in the
mandated Debt Equity Ratio (2:1 as mandated by the Act, s5:1 as proposed by SEBI). As
per the revised approved norms, the ratio cannot exceed 6:1 for standalone firms,
though the overall cap remains at 2:1.
• The Partial Credit Guarantee Scheme was launched by the Government in August 2019,
wherein the Public Sector banks would buy high rated pool of assets from financially
sound NBFCs, upto Rs. 1 Lac Crores. The government had agreed to provide a cushion
for losses upto 10% of the assets bought. However, 3 months post the launch of the
scheme, lack of clarity on whether to treat the transactions between the banks and the
NBFCs as ‘Securitzation Deals’ or ‘Pass through Certificates (PTCs)’ has impeded any
movement of funds. The same is owing to accounting implications, with profit booking
having to be booked upfront for Securitization deals, and can be spread over for the PTC
deals.
• The Investments by Mutual Funds in the Indian NBFC sectors (despite the liquidity
boost announced in December 2018) as dried down owing to the NBFC Crisis that has
loomed over the sector. The funds invested just 7.1% of their assets in Commercial
papers from Shadow Lenders and 6.9% in the bonds. The mistrust has built up owing to
repeated defaults by lead players including IL&FS Group, DHFL, Reliance Capital Ltd etc.
Other major players such as Edelweis Housing Finance Ltd, Piramal Capital and Housing
Finance Ltd and PNB Housing have seen their debt ratings cut over the last 2 quarters.

Asset Management Companies:

• The Assets Under management of Indian Mutual Funds surged by 7.4% on a monthly
basis to touch a record high of Rs. 26.33 lac Crores in October 2019, aided primarily by
Rs. 93k Crore inflows in form of liquid funds. The Retail investors continued to invest
through the SIP route, with the inflows from SIPs crossing the Rs. 8000 Cr mark for the
11th time this October. The industry garnered more than Rs. 49,000 Cr (an increase of

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 11% in the comparable period last year) in the first six months of the current fiscal
through thi route. The lumpsum investments in equity funds, as compared to the SIP
form, have slowed down.
• Emerging investment instruments such as Real Estate Investment Trusts (REITs) and
Infrastructure Investment trusts (InvITs) seem to be catching on with investors, as
Mutual Funds have invested nearly Rs. 9,000 Cr in such instruments since the start of
2019. The REIT and InvIT guidelines were first issued by SEBI in 2014, revised again in
2016 and 2017, however, the inflow of funds into these instruments was not as
anticipated. SEBI, post meeting with foreign investors, primarily in the USA witnessed
key interest for such instruments amongst them.

Capital Markets:

• The Indian Stocks are set to rise over the coming year, ie 2020, however, the gains will
be limited as per a Reuters poll of equity strategists. The reason for limited gains is
owing to the fiscal stmulus and monetary policies having failed to revive growth and
prevent an economic slowdown in the country. The expectedrise of stocks would be half
that of this year’s rally as per the experts.
• Private Equity firm Walburg Pincus is looking to raise USD 1.5 Billion for its first fund
targetting deals in India. The fund would be focussed on sectors such as Financials,
Manufacturing and Consumer, and shall be launched in the first half of the next year.
Private Equity investments are expected to pick up in India, though, launches of India
only funds by big PE firms is generally rare.
• The Securities and Exchange Board of India (SEBI) has banned Karvy Stock Broking Ltd
(KSBL) over client defaults of over Rs. 2,000 Cr with immediate effect in November,
2019. This follows an investigation by the National Stock Exchange (NSE) which found
out that Karvy had allegedly sold client stocks pledged with it through ssociated entities.

Insurance:

• The Insurance Regulatory and Development Authority (IRDA) has come up with a revised
set of rules for Group Insurance products, where, some insureres, to grab a bigger share
of the markets undercut premiums and indulge in practices that could potentially harm
hem in the future. The regulator has mandated that the group insurance schemes
should show collection of premium, issue certificate of insurance and also
reimbursement of expenses. Also, there should be no discrimination in interest rates
declared under group savings projects.
• Tencent Holdings (known for its dominant WeChat app) has acquired a minority stake of
10% in Policybazaar.com, and is looking to get a hold in the country’s burgeoning
insurance sector.

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Growth Drivers in Future:

NBFCs:
• The opportunity to tap the bottom pyramid in India’s economic structure, and offer
them products suited for Rural finance and Micro credit lies at the helm of Credit
Penetration in India, and a scope for the NBFCs to adapt and grow.
• Also, the emergence of technology, and rise of FinTech firms can be viewed both as
a competiton and a chance to collaborate and grow for the NBFCs. Integrating their
existing processes and focus on customers alongwith adapting to newer
technologies to reduce cost and scale operations effeciently is the most mimportant
factor for the growth of NBFCs in the next decade.

Capital Markets:
• The Indian Equities market is expanding rapidly in terms of listed companies and
market capital, wideing the playing field for brokerage firms. Sophisticated products
segment is growing rapidly as witnessed by the steep rise in the Derivatives trading
segment
• Total Wealth held by individuals in unlisted equities is projected to growat a CAGR of
19.54% to reach Rs. 17.64 lakh Crores by 2022.
• With an increasing retail penetration for investments and a growing financial
awareness amongst people, the Indian Capital Markets are bound to grow in the
coming decade.

Asset Management Companies:

• The inclusion and awarness of investment products such as REITs and InvITs is
touted to lead the investment patterns as well as attract forieng capital in to the
Indian Markets in the next decade
• On the retail front, better products in form of SIPs and other plans for retail
investors would enable a larger population percentage to participate in the Asset
Management markets.

Insurance:
• The Health Insurance sector has a huge potential to grow, considering the fact that
only 1% of the total population is currently covered under any scheme.
• The Micro Insurance Segment, focussed at the rural population, potentially
addressing 2/3rds of the total Population of India is the crucial element over the
next decade wherein tapping the segment would provide opportunities for growth.

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Major Coverages over the last one year:

a) The IL & FS Crisis:

The Infrastructure Leasing and Financial Services (IL & FS) is an NBFC, established over 30
years ago and operates as a conglomerate that funds infrastructural projects across India.
The Company, fell short of cash, and defaulted on a lot of its obligations. It defaulted on
repayment of Bank Loans, Short Term Deposits, and also failed to meet its commercial paper
obligations. The primary reason for the default was attributed to the Asset Liability
mismatch by the Company, wherein to fund infrastructure projects having a very long
payback period, the firm repeatedly availed short term finance. With an inability to meet
obligations, the firm resorted to availing further short term obligations to pay off its long
term obligations, leading to piling up of debt. The Capital structure of the Conglomerate
comprised heavily of Debt as against very low equity, leading to the Company having no cash
to pay off its obligations.

b) The DHFL Crisis:

The Initial massive drop in the DHFL Stock was caused by a combination of fear created by
the IL and FS Crisis, a leading Mutual Fund house selling the Commercial Paper of DHFL
(causing panic), and speculations about the NBFC having a massive fraud of Rs. 31,000 Cr
waiting to be uncovered. However, till that point, no such revelations were made by the
Company, and the reductions in Stock Value were attributed to mere stock market
estimations. The Company, did, though, eventually default upon its obligations to the tune
of Rs. 900 Cr in June 2019 (Combined defaults of RS. 1500 Cr+ as at August 2019), which
prompted the rating agencies to downgrade its ratings to Default level.
The Company was further hit when instances of fund diversions were revealed in a Forensic
Audit conducted by KPMG. The Serious Fraud Investigations Office (SFIO) has intended to
start an investigation, which would mean freezing of all repayment to the lenders, affecting
the Rs. 10,000 Cr. Fixed Deposits that the company holds as well as the Total Exposure of Rs.
38,342 Cr that the Banks have towards the company.

c) Karvy Stock Broking Limited Crisis:

The Securities and Exchange Board of India (SEBI) has banned Karvy Stock Broking Limited
(KSBL) over client defaults worth Rs. 2000 Cr with immediate effect in November 2019. The
Company has been banned from taking new on new clients as well as executing trades for
the existing clients.
The ban is a result of an investigation carried on by the National Stock Exchange (NSE)
wherein it found out that the Company had sold client stocks pledged with it through
associate entities. The NSE alleged that the Stock Broker misused the Power of Attorney
given to it by its clients. Karvy sold client securities in the market through its entities for its
own purpose.

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References:
1) https://www.ibef.org/industry/financial-services-presentation)
2) https://www.marketwatch.com/press-release/2019-global-financial-services-market-
research-reports-industry-analysis-2019-07-29?mod=mw_quote_news
3) https://www.pwc.in/consulting/financial-services.html
4) https://www.pwc.in/assets/pdfs/consulting/financial-
services/fintech/publications/emerging-technologies-disrupting-the-financial-sector
5) https://www.eiu.com/industry/financial-services/asia/india
6) https://economictimes.indiatimes.com/topic/NBFC
7) https://economictimes.indiatimes.com/topic/Indian-capital-markets
8) https://economictimes.indiatimes.com/topic/asset-management-companies
9) https://m.economictimes.com/topic/Indian-insurance/news

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