The Outlook for the Indian Financial Sector

India has a diverse and expanding financial sector, with many new firms joining an already robust market. Government reforms, as well as initiatives by the Reserve Bank of India, have improved access to credit and finance for micro, small and medium-sized businesses, increasing the range of products that financial providers can offer. At the same time there are legitimate concerns over the extent of outstanding loans, particularly considering the country’s economic slowdown.

An overview

The Indian financial sector is dominated by commercial banks that hold 64% of the assets in this area. But while it is therefore predominantly a banking sector, the financial sphere also encompasses insurance companies, non-banking financial providers, pension funds, mutual funds, co-operatives and other interests. The total assets under management (AUM) held by the mutual funds industry in India totalled 23.8 trillion rupees between April 2018 and February 2019.

The number of mutual fund portfolios in the country reached 74.6m by June 2018. The insurance sector has also seen rapid expansion in recent years, and there has been a huge increase in the number of mergers and acquisitions.

Help for businesses

In 2017 the Small Industries Development Bank of India (SIDBI) launched ‘Udyami Mitra’, a portal for micro, small and medium-sized enterprises to easily access credit and business loans. The Micro Units Development and Refinance Agency (MUDRA) and the Credit Guarantee Fund for micro and small enterprises are further examples of state assistance for new businesses, improving financial flow.

Market trading

Traders are hopeful that the stock market will gain ground over the next Samvat, with key equity indexes having risen by 10% and more since the previous Diwali. Recent rate cuts and stimulus measures should provide a boost to a market that has still tended to play it safe in the aftermath of the credit crisis. For those seeking more adventurous trading, such as in binary options or CFDs, this iq option review should point the way.

Broader economy

The Indian economy grew at its slowest pace for six years during the second quarter of 2019, dropping to 5%. This led the World Bank to revise its 2019 growth forecast for the country downwards, from 7.5% to 6%. Moody’s Investor’s Service was even more pessimistic, lowering its 2019-20 forecast from 6.2% to 5.8%. A recent survey of South Asian and Indian economists resulted in an average growth prediction of 5.7%.

Cyclical or structural?

The World Bank described the slowdown as largely cyclical, meaning that an upturn is inevitable. According to its South Asian Economic Focus Report, India’s rate of economic growth should be back on track by 2021. Others are less sure however, citing other more long-lasting factors at play. It seems that in fact a mix of cyclical and structural issues are to blame, but the exact balance remains open to debate. 

Similarly, the Indian economy is impacted by external factors over which it has little or no control, such as the fortunes of other major global economies: the US, China and Europe in particular. It’s important to bear in mind that relative to the growth rate of other countries, India is still one of the world’s fastest growing economies.

Vulnerabilities in the financial sector

The World Bank has called for sweeping reforms in the financial sector in order to bring India back to its former rate of rapid growth. There are claims that the financial sector is responsible for a high number of bad loans, and that non-banking finance companies have a significant share of the total number of loans in India. These companies in turn usually have liabilities to the banks, and so this represents a worrying web of vulnerabilities throughout the whole sector.

Although there have been liquidity-enhancing measures in recent times, we can see how a series of defaulting loans could trigger an industry-wide liquidity crisis. The fact that many Indian corporations have severely over-leveraged balance sheets adds to the current high level of risk. The economic slowdown is causing many companies to have to revise their expectations and the likelihood of them not being able to meet loan repayments is raisedas a result.

Conclusion

India’s economic slowdown is far from being a recession and should right itself given time. However, it has revealed serious vulnerabilities within the country’s financial sector. The outlook depends on whether businesses can whether the downturn and not precipitate a financial chain reaction of bad debts throughout the industry. While traders remain optimistic, a large amount of housework needs to be seen to as soon as possible behind the scenes if dire consequences are to be avoided.

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Ajay Deep

Ajay Deep is a young enthusiast who Loves Chandigarh and is always eager to make this beautiful city even more beautiful. A Mechanical Engineer By Chance and Working in an IT MNC by Choice. A Writer, Photographer and a Budding Entrepreneur. A Designer, Developer and Digital Marketing Expert. In brief : A Jack of All Trades and Master of Few :) You may reach Ajay Deep at ajay@chandigarhmetro.com