BFSI SECTOR OVERVIEW

• Total banking assets of $2.3 tn stood in 2019 in public, private and foreign banks
• Total credit extended has increased to $2 tn at a CAGR of 14% from FY16-20
• 8^th largest foreign currency reserves by country - $535 bn (July 31, 2020)
• Highest FinTech adoption rate of 87% versus global average of 64% (2019) 
• FinTech software market of $2.4 bn by 2020 from $1.2 bn in 2016
• 4^th largest FinTech market in the world with 2,100 startups 
• Digital payments market expected to reach $1 tn by 2023 
• Digital lending poised to reach $100 bn by 2023
• Insurance industry size of $280 bn by 2020 with CAGR of 12-15% for next 3-5 years

DEMAND DRIVERS

• JAM Trinity (Jan Dhan, Aadhar and Mobile) enabled 360 million new bank accounts, 1.2 billion formalised identification and 1.2 billion mobile user base across India
• India Stack - open API platforms i.e. Aadhar, UPI, Bharat Bill Payments and GSTN
• Increase in working population and growing disposable income to raise the demand of banking and related services. Rural banking also a key growth driver
• India's Microfinance - Largest market in the world, with a clientele of over 42 Mn
• Low insurance penetration (3.7%) as compared to (6.3%) presents the sector opportunities for growth such as innovative products (ULIPs) and InsurTech
• Digital Push - Mobile banking, internet banking, neo-banking and rise in digital products and solutions by private and government support 

POLICY SUPPORT AND INCENTIVES

FDI Policy

• Insurance Intermediaries (100%) - Automatic route
• Regulated FinTech services (up to 100%) - Automatic route 
• Banking -
  • Private Banks - 74% (49% under automatic route)
  • Public Banks - 20% (government route) 

Recent Reforms

• Increase in FDI allowance in insurance intermediary sector from 49% to 100%
• Cashless India – Unified Payments Interface (UPI) 
• Digital India - 500 mn internet subscriptions
• India Stack
• Aadhaar Enabled Payment System (AePS) 
• Pradhan Mantri Jan Dhan Yojana (PMJDY) - Drive toward financial inclusion of unbanked population

MARQUEE DEALS AND INVESTMENTS 

• FinTech investments nearly doubled to $3.7 bn in 2019 across almost 200 deals
• Investments included Paytm ($1.7 bn) and Policy Bazaar ($280 mn)
• Jan-June ’20 saw investments of $1.5 bn i.e., 60% increase YoY (same period)

INTERVIEW WITH RAJEEB MALLICK, NAVI TECHNOLOGIES

How do you see the major trends that you witnessed during Covid19 in Lending, Wealth and the broader Fintech segment taking shape in 2021?

Credit penetration in India still has a long journey to take with regards to reaching the last mile citizen, and it is therefore imperative that steps are taken by the regulator and the government to make available the right regulatory framework which shall provide impetus to the banking and non-bank sectors. There have been several measures taken by the government to boost credit supply in the market, banks are already flush with funds and the lending rates are almost at an all-time low in the past decade and a half, but inability to score the customer due to slightly rigid data-privacy concerns, disallows the lending institution to extend small ticket-size loans to individuals, mostly the first-time borrowers, to be granted loans. 

What are some of the underlying developments in the industry to boost financial inclusion and literacy for onboarding the next billion users, and bridging the credit gap to MSMEs going ahead into 2021?

While the regulator has been emphasizing the need for total adherence to the PSL (Priority Sector Lending) norms by the banks, but in reality, if one may analyze, the banks are still very reluctant to take that risk, and rather allow the NBFCs to meet that gap, due to poor collection/recovery statistics, on account of tremendous political pressure against recoveries, particularly in the rural sector. Most of the NBFC-MFIs have suffered in 2020, due to the implementation of the moratorium consequently poor collections. Those outstanding amounts are either likely to be classified as bad-loans, and to be written off, and therefore the books for 2021 for these lending institutions are likely to take a hit in the coming fiscal. 

Fintech has been one of the most attractive and evolving sectors in the startup space in India and globally. How do you see the startup activity evolving in this space in the year ahead?

It is true that fintech is one of the most attractive and evolving sectors in the start-up space and bright young minds, fresh from their technical/management schools are making entry into this sector, due to low entry barriers, but ideally for them to be profitable and not lose the investors’ money, it is also critical that the ecosystem they are operating in, must be given the adequate flexibility to maneuver and have necessary access to use the data verification systems to make their lending decisions fool-proof. 

How have sector-specific reforms (video KYC, liberalized FDI in insurance intermediaries, innovation sandboxes, digital payments, PSL status for startups, etc) helped the sector thrive and be resilient during the Covid-19 period and what are some of the areas for further improvement?

While the sector specific reforms mentioned are a great relief and a major relief for the fintech industry, but it is still not adequate, as the cybercrime rate for financial frauds are on the rise. 

Our suggestion would be: 

• That the cyber-crime reporting system that has been opened on the portal be made more effective and with the requisite powers to act on such matters on a time bound manner. This would allow the fintech companies to be assured of effective deterrent action for the fraudulent transactions by individuals.
• Allow greater access to individual data which are harmless and does not really encroach upon any individuals’ life and liberty, and only make the fintech sector, robust and effective. This shall have a positive impact on the overall industry, and the lending rates can see a further dip. 

Going ahead, what are the 3 most important outcomes that you would look forward to from Budget 2021 for the financial services industry?

• The housing sector provides a major fillip to the economic growth of any country, due to the involvement of the core sectors like cement, steel and other materials used in the construction work. Needless to say, the huge, primary secondary and tertiary employment opportunities it creates. However, there are also instances, where the low to middle income group individuals with the hope of getting their dream house, lose their life savings and ends up paying the EMIs to the lending institutions all through their lives and running from pillar to post for redressal of their grievances. While the RERA Act passed earlier in the last decade was a welcome move, but it is required that all the state RERA authorities disseminates more detailed information on their website against the RERA registration numbers allotted, about the stages of construction and adherence to the time lines, which would help the home loan companies and buyers alike, in selecting the right project for buying/booking their dream houses. It will also facilitate the good builders to be rewarded and unscrupulous ones penalized. 
• NBFCs-MFIs which usually operate in a localized area and have greater information of the buying power of the rural India, be allowed to also participate in home loan financing in the rural India, which shall provide huge support to the rural housing sector. 
• All available data on individuals which does not directly encroach upon any individuals’ rights or liberty be allowed to fintech companies, with express consent from the loan seeker. This would facilitate right quantum of lending commensurate with the individual’s repaying capacity and not over-burden him or push him into a debt trap. 

* The views and opinions expressed above are solely of the interviewee. The content does not reflect Invest India's position or opinion and Invest India bears no responsibility for the same.

Update: On December 3, 2021, Hon'ble Prime Minister Narendra Modi will inaugurate the Infinity Forum on fintech, which among other things will discuss and come up with actionable insights into how technology can be leveraged by the fintech industry for inclusive growth.