Exploring the Growth of the Finance Sector

India’s financial landscape has undergone a profound transformation. in recent decades, showcasing world-class infrastructure, well-regulated institutions, and a robust capital market framework.

With a solid foundation and India’s trajectory toward becoming a $5 trillion economy, the financial services sector offers immense opportunities for value creation. The fintech ecosystem is experiencing vibrant innovation as well.

The Indian economy is on track to achieve a growth rate exceeding 6.5%, attributed to a stronger-than-expected performance in July-September (Q2FY24).

Government initiatives like Jan Dhan, Aadhar, and UPI have been transformative, and ongoing innovations such as differentiated banking and insurance licences, Central Bank Digital Currency (CBDC), Account Aggregator, the Open Credit Enablement Network (OCEN), Digilocker, and the Open Network for Digital Commerce (ONDC) continue to propel progress.

Revolution in Finance: From Mutual Funds to Digital Payments

The financial landscape’s expansion was markedly propelled by transformative changes in the banking and investment sector, particularly for mutual funds, which saw the industry grow almost fourfold to reach ₹27 trillion currently. A standout player in this growth trajectory has been the systematic investment plan (SIP), capturing investors’ attention with its alignment to a cautious approach in committing lump sums to the market.

Building on this progress is the transformative impact of technology on banking, making it smooth, quick, and cost-effective. The National Payments Corp. of India’s UPI, active since August 2016, has genuinely revolutionized the way we handle payments, showcasing a clear change in consumer habits.

Even our neighbourhood street vendors—they’re now using QR codes for payments. This shows how widely adopted this technology has become, even for small businesses.

It’s not surprising that the Boston Consulting Group predicts a substantial growth in India’s digital payments market, forecasting an increase from $3 trillion to $10 trillion by the year 2026. Undoubtedly, the past decade has marked a significant paradigm shift towards inclusion and digitization.

As the banking sector thrived on technological advancements, our extensive banking system, comprising 137 banks and 120,000 branches, boasts deposits totalling $1.35 trillion and outstanding credit of $900 billion. Notably, the sector is on a trajectory of doubling in size every five to six years.

However, a significant disparity becomes evident in the contribution to total deposits. While rural India, representing over 60% of the population, contributes less than 10% to the deposits, urban India, comprising only around 12% of the population, contributes a substantial 50-60%. Additionally, women own a mere 20% of the total deposits, underscoring the critical need for enhanced financial inclusivity.

Adding to this challenge, another significant issue arises with credit accessibility, especially for many underserved individuals in India who still struggle to secure loans. The situation is particularly daunting for homemakers in rural areas, where societal norms may not be accustomed to women participating in financial matters. Consequently, some banks and moneylenders simply decline to work with them. This inequitable practice intensifies the difficulties women face in obtaining financial support, underscoring the urgent need to reform lending practices for the sake of equal opportunities.

As women in rural areas struggle to access credit, similarly, young college kids face obstacles in pursuing higher education due to limited financial resources. The enhancement of credit accessibility holds the key to unlocking a myriad of educational opportunities, refining skill sets, and nurturing entrepreneurial spirit. These reforms will not only empower individuals to actively pursue their passions but also facilitate the acquisition of vital assets, fostering financial responsibility from a young age.

Encouragingly, several fintech solutions are emerging to address this disparity and aid the underserved Indian population. These advancements signal a positive shift towards a more inclusive financial future for India, where barriers to credit are dismantled, ensuring that everyone has equitable access to financial assistance.

Despite these disparities, our financial landscape boasts relatively low non-performing assets (NPAs), constituting only 3-5% of total assets. Furthermore, we maintain a capitalization level with an 18% Capital Adequacy Ratio (CAR) and impressive return ratios, showcasing a Return on Equity (RoE) of approximately 15%.

What the future holds

It’s safe to say that India’s financial landscape has propelled forward, riding on the back of technological advancements. Yet, a noteworthy portion of the credit for this growth is also owed to the millennial and GenZ generations.

As the ranks of tech-savvy Indians grow, supported by a wealth of tech talent and a sturdy financial infrastructure, the seamless incorporation of artificial intelligence (AI) and machine learning (ML) signals a forthcoming transformative shift in the sector.

The author is Founder & CEO, Credilio. Views are personal