India's banking and financial services companies will brace for new challenges in 2017 as the entry of new types of lenders intensifies competition while high bad loans and demonetisation continue to haunt the sector.
The main challenges for traditional banks and non-banking finance companies would be demonetisation and competition from new-age firms such as payment banks, small finance banks and mobile wallets.
Meanwhile, other segments such as insurance will continue to see heightened activity while financial-technology ventures will also hog the limelight.
The government’s 8 November decision to outlaw high-value notes has caused a cash crunch and hit business activity. This has hurt credit growth, a sign of trouble for banks.
Besides banks, microfinance companies have also been hurt as most weekly collection takes place in cash and in small amounts. The poorer sections of the society will find it difficult to adopt digital payment modes, and this might affect microfinance companies as well as small finance bank because of the similarity in their client base.
Care Ratings said in a recent note that, after demonetisation, MFIs are increasingly looking for cashless disbursement and collection. The credit profile of MFIs with high financial leverage and low collection efficiencies will worsen, it said.
Kaushal Shah, associate director and head of the financial services sector at Kotak Investment Banking, said while operational difficulties will likely normalise in a couple of months, growth will take a hit and bad loans might rise.
However, the push for digitization of financial services and the broader reset of the financial services sector in 2016 will give rise to more opportunities for growth, said Ausang Shukla, director for corporate finance, Ambit Pvt Ltd.
Sumit Jalan, managing director and co-head of investment banking andcapital markets for Credit Suisse in India, said the government's thrust on less cash will increase transaction volume, intensify competition and attract additional investment in 2017, all of which will help make the financial services sector more robust.
The year gone by saw ICICI Prudential Life Insurance Co. Ltd float the first initial public offering by an Indian insurer. More companies could follow its footsteps in the coming year, with SBI Life Insurance likely among those.
State-run general insurance companies are also likely to hit the capital markets in the next one or two years. General Insurance Corporation and New India Assurance could, being the leaders in their respective segments, be the first ones to list, though they are awaiting a go-ahead from the government, said Kotak’s Shah.
A directive from the government is likely in a couple of months and that would pave the way for these companies to hit the market by the end of 2017.
Credit Suisse’s Jalan said consolidation activity in insurance and asset management sectors will continue. Subsidiary-level M&A deals and private placements by financial services conglomerates are other trends to watch out for.
Small finance banks, payments banks
Of the 10 companies that got in-principle approval to start small finance banks, two have already been listed on the bourses. Several other small finance banks are likely to finalise plans or even go public in 2017.
In the category of payments banks, telecom operator Bharti Airtel started its payments bank last year while earlier this week mobile wallet and e-commerce firm Paytm for final approval to begin operations. More payments banks will likely start operations as the year progresses.
The impact of the new small finance banks and payments banks will be evident over the medium term since the total assets of all the small finance banks are less than 0.5% of the assets of the banking sector, Ambit’s Shukla said.
Jalan said small finance banks are fringe players and will need to make much more investment in capital, talent and technology in order to have an impact in the financial services space. “Payment banks, however, have started making their presence felt, given the demonetisation move by the government and the push toward digital banking,” he said.
Ritesh Chandra, executive director and head of consumer and business services group at Avendus Capital said, growth in disbursals from non-banking finance companies, mortgage lenders and small finance banks is likely to be muted in 2017.
“While there may be a transient dip in asset quality, a lot of these entities would seek growth capital towards the third quarter of next year to recapitalise their books,” he said
Most fintech companies are currently viewed only as facilitators of incremental business for financial services companies or banks. However, some of them, including some payment gateways, are likely to become sizeable in the near term.
Over the past two years or so, more than 25 online lending startups have emerged in India. Most of them have also attracted private funding.
Jalan said fintech is a sunrise segment. With greater digital push from the government and early building blocks in place, this segment is likely to take off this year and next, he added.
“With the RBI keen to promote more competition, there was positive regulatory impetus for new players to enter the banking sector, whether it be small finance bank licences or main bank licences,” he said.
The ghost of demonetisation may come back to haunt the banks if a lot of accounts turn into non-performing assets (NPA) or lead to some degree of stress. The rate of recovery of NPAs was 10.3%, or Rs 22,800 crore, out of the total NPAs of Rs 221,400 crore in FY16, compared with 12.4% in FY15, RBI data show.
Care Ratings said in a December note that demonetisation has affected industries and this can put further stress on the NPA situation in the third and fourth quarter. “Hence, the overall picture for NPAs would tend to be more in the upward direction until such time that there is a major shift in the state of economy and the currency situation normalizes.”
Jalan said structural changes in terms of going after defaulting borrowers, enforcing asset sales and cleaning leveraged balance sheets might turn the situation for the better.
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