Capital markets set to
be growth catalyst for India
January 31, 2019 9:19 am
By 2025, India will have one of
the most sophisticated financial markets in the world, with the best practices
and adoption of cutting edge technologies. Companies have to identify the right
business model and funding model to capitalise on emerging opportunities,
says R.Kannan
India
has a very robust capital market and if the economic growth continues its
momentum, by 2025 India could be among the top three capital markets in the
world. India is growing at a rate of more than 7 per cent per annum now and
going forward, for the next few years, Indian economy is likely to grow at a
CAGR of 7 per cent. Many strategies and action plans are being discussed by
various stakeholders on how to reach a Gross Domestic Product (GDP) of $5
trillion, as fast as possible. The robust growth in India is facilitated by
various sources of funding. India is gradually moving from bank-based funding
model to market-based funding model. In fact, in the last two years, markets
have played a major role in meeting the funding requirements of corporates and
the government. In the financial year 2018 (FY18), the funds raised from the
capital market through equity and debt amounted to Rs 8.8 lakh crore, more than
$100 billion.
India
has one of the highest gross savings in the world. The savings of 30 per cent
is mainly invested in physical assets in India and only a small portion of the
savings is invested in capital markets. The level of financial intermediation
in India is insignificant compared to other major markets in the world. The
savings in the economy is about $750 billion a year and for infrastructure,
India requires only $200 billion a year and including the capex in other
sectors, the requirement of funds is lower than the overall savings. If a
higher level of financial intermediation is achieved, this will result in
meeting the funding requirements of Indian corporates and government through
internal, domestic sources. Today, there was a reliance on foreign direct
investment (FDI) and other investments by FIIs/FPIS from abroad to meet the
funding requirements. A well-developed capital market will facilitate the
channelising of funds smoothly to the required sectors.
Economies
in the world can be classified into three categories in terms of how the
funding needs in the economy are met. In the first category, many of the
developed countries figure and the main sources of funding in the economy are
capital markets. Even the charitable institutions and municipal bodies go to
capital markets to meet their funding requirements. The second category of
countries rely on both bank funding and capital markets to meet their fund
requirements. In the third category, most of the funds required come from the
banking system. India falls under the second category and the capital markets
are in a take off stage and in future it is likely that the funds raised from
capital markets will exceed the funds raised from banks. This trend is already
visible in the Indian market. India is moving towards a higher level of
financialisation.
The
recent trends in digitalisation, demonetisation, financial inclusion, investor
awareness, new financial products, introduction of GST and fintech revolution
would accelerate the process of financial intermediation. The faster adoption
of emerging technologies by customers including mobile transactions and digital
transactions will help in introduction of many new financial products. The other
trends which will accelerate the growth of capital market include: Opening of
bond markets to retail segment, introduction of Real estate investment trusts
(REITs) and infrastructure investment trusts (InvITs), securitisation, rising
incomes, adoption of financial products in rural areas, cross sale of financial
products, increasing popularity of wealth management and development of
commodities trading market.
In
any economy, where the per capita GDP is above $1500, the financial services
sector grows at double the rate of the GDP growth. Assuming that, our economy
will grow at a CAGR of 7 per cent in the coming years and reach a level of $4
trillion by 2025. The savings in a year will rise to $1.2 trillion. The capital
markets will see a growth of 14 per cent CAGR. The resources raised from
capital markets in a year will rise from $120 billion in 2018 to $300 billion
in 2025. Mutual funds have become very popular in India and in the last few
years and the industry size was at $331 billion at the end of March 18. At a
growth of 15 per cent CAGR, the size of assets managed by mutual funds will
rise to $880 billion by March 2025. The concept of systematic investment plans
(SIPs) and the government outsourcing the management of corpus of the pension
and other organisations also will a give a fillip to the mutual fund industry.
IPOs & secondary
markets
India has the largest number of listed companies in the world and the average
amount raised in Initial public offerings (IPOs) by a company has multiplied
several times. Further, the stock exchanges also had opened windows for
companies from SME sector to get listed and separate platform for trading of
the stocks. There is a continuous introduction of new products and processes in
the market, which will make the financial intermediation take off in a big way.
Life insurance
The penetration of insurance in India is very low and at the end of March 2017,
the sector had a premium of $64.64 billion. The CAGR in the past was around 13
per cent. Assuming the same trend will continue, the size of this sector will
rise to $170 billion annual premium. The share of private sector and new
products in the overall pie will increase.
Non-life insurance
The size of the industry at the end of March was at $19.71 billion (premium).
The industry is likely to grow at a CAGR of 14 per cent per annum. The premium
by March 2025 is likely to rise to $56 billion a year. The insurance industry
is likely to have assets under management of more than $1 trillion by 2025.
Only insurance and pension industries have long term funds, which can be
deployed in Iong-gestation infrastructure projects without any asset liability
mismatch.
Pension funds
The funds under the management at the end of October 2018 was at Rs 2.63 lakh
crore. This industry is likely to grow at more than 20 per cent per annum. The
industry can provide long term funds for the Infrastructure sector. By 2025,
the industry size is likely to be at Rs 10,00,000 crore.
Private equity &
venture funds
In India, the concept of alternate assets has taken off. Various types of funds
focussing on different aspects of the economy have emerged. Various new
initiatives by the new government has given a big fillip to start up movement
in India and at the end of 2017, the PE investments in India were valued at
$26.45 billion and they grew at a CAGR of 28 per cent in the last five years
and assuming that, they will grow at 20 per cent CAGR in the coming years, the
industry will grow to $110 billion.
NBFCs
In the last few years, Non-banking financial companies (NBFCs) were growing at
18 per cent+ per annum and they had gained market share from bank funding.
Especially, in realty funding, NBFCs increased their share substantially. But
most of their funding was coming from banks and mutual funds. NBFCs mobilised
short term funds and deployed in long term assets. This has resulted in a
mismatch of asset liability. Their under writing losses also increased. Due to
recent fiasco in the NBFC sector, these companies are in the process of
realigning the business model and funding model. Despite the setback, this
sector is likely to grow at a CAGR of 15 per cent in the coming years. Their
share in total outstanding credit in India stands at 18 per cent and this is
likely to rise to 25 per cent by 2025. The recent developments in the banking,
financial services and insurance (BFSI) sector including the issues relating to
NBFC sector and emerging vigilant regulation will force the marginal players to
exit the business. There will be a consolidation from mergers and acquisitions.
The companies with good underwriting skills, robust asset and liability
management (ALM) and diligent risk management system will take over the weaker
ones leading to consolidation of the industry.
To
become the third-largest capital markets in the world, some of the action plans
which could be taken by the authorities and stakeholders could include: Create
enabling legislation for the faster growth of the markets. Stable policies.
Assuring a certainty of implementation of policy/rule for at least five years.
Improve the ease of doing business in these sectors. Allowing the introduction
of new financial products available in other parts of the world. Introduce many
new products where, the main target segment will be retail customers.Create an
integrated and unified approach to regulation of all the business segments in
capital market. Create incentives for investment in long dated instruments.
Move towards a single KYC concept in the financial services sector. Create a
centralised data base, where the data from all the regulators are aggregated,
stored and used for formulating future policies. Develop a robust system for
security of data and use of data for authorised purposes.
Use
the electronic media to create an awareness among most of the population on the
financial products. By 2025, India will have one of the most sophisticated
financial markets in the world, with the best practices and adoption of the
cutting edge technologies. Customers will have wider choice of financial
products to choose from. The technology will bring challenges including cyber
security and by 2025, the adoption cyber security solutions will have attained
a maturity. India will become one of the most attractive markets for investment
and our market capitalisation is likely to be in the top three in the world.
Banks and financial services companies constitute a significant portion of the
market indices in India today and in the total market capitalisation of the
country. Considering the high growth of the capital markets, the preference for
BFSI stocks will rise further and their share in overall market capitalisation
will rise. The capital markets will play a major role in the years to come. In
future, there will be a thrust on innovation in products, processes and
distribution channels which will increase the share of capital markets in
financial transactions in the economy. In conclusion, the future of capital
markets in India is good and will grow at a healthy growth. The capital market
offers opportunities for stakeholders including companies, banks, NPFCs,
insurance companies, wealth managers, pension funds, private equity and venture
capital and brokers. The higher level of financial intermediation and faster
adoption of fintech technology will ensure a higher growth of capital markets.
Companies have to identify the right business model and funding model to
capitalise the emerging opportunities and participate in the growth of capital
markets.
The author is Head
Corporate Performance Monitoring and Research, Hinduja Group
https://www.freepressjournal.in/business/capital-markets-set-to-be-growth-catalyst-for-india/1448605
