The far-reaching changes in the Indian economy since liberalization have had a deep impact on the Indian financial services sector. Financial sector reforms that were initiated by the government since the early ‘90s have been to meet the challenges of a complex financial architecture. This has ensured that the new emerging face of the Indian financial sector will culminate in a strong, transparent and resilient system.
Broadly, financial sector reforms can be categorized in two phases. The first phase of economic reforms that started in 1985 focused on increasing productivity, new technology import and effective use of human resources. These efforts were in line with the changes in international markets, organisations and production areas. In the second phase, beginning in 1991-92, the government aimed at reducing fiscal deficit by opening the economy to foreign investments. Financial sector reforms during this period focused on modification of the policy framework, improvement in financial health of the entities and creation of a competitive environment. These reforms targeted three interrelated issues viz. (i) strengthening the foundations of the banking system; (ii) streamlining procedures, upgrading technology and human resource development; and (iii) structural changes in the system.
The last decade witnessed a significant broadening and deepening of financial markets with the introduction of several new instruments and products in banking, insurance and capital markets space. During this time, the Indian financial sector (banking, insurance and capital markets) opened up to new private players including foreign companies. The new players adopted international best practices and modern technology to offer a more sophisticated range of financial services to corporate, retail and institutional customers. The consequent competition in the market brought in innovation, better customer service and efficiency in the financial sector in India.
Financial sector regulators too have been proactive in ensuring that new regulations and guidelines are more or less in tandem with the growth in the financial sector. Financial intermediaries have gradually moved to internationally acceptable norms for income recognition, asset classification, provisioning and capital adequacy. These developments have given a strong impetus to the development and modernization of the financial sector in India. Going forward the aim would be to achieve international standards in this area within the shortest possible period.
India’s services sector has been the most dynamic part of its economy, leading GDP growth for past two decades. India serves as an example as to how services sector can play an important role in a country’s economic growth. India is doing reasonably well in retail sector and the financial sector including insurance. India is now eager to open up the pensions sector also to foreign investors. The way these sectors have been developed with a robust regulatory and policy framework also holds important lessons for other countries. India’s financial services sector has been one of the fastest growing sectors in the economy. The economy has witnessed increased private sector activity including an explosion of foreign banks, insurance companies, mutual funds, venture capital and investment institutions. Although significant steps have been taken in reforming the financial sector, some areas require greater focus.
- The ability of the financial services sector in its present structure to make available investible resources to the potential investors in coming years, such as equity and long term, medium and short-term debt.
- The inability of banks to quickly enforce security and access to collateral, and the capital constraints in recognizing large loan losses.
- Volatility in global commodity prices has had a major impact on Indian companies. This has led to non-performing loans and provisioning for credit losses becoming a key area of concern for the Indian financial system.
What should domestic & foreign firms do to thrive in this strategic environment?
The current trend worldwide and the present debate within the country, suggests that the end of stratification between sectors and consolidation within sub-sectors would be inevitable. For example the financial services sector may be broadly categorized into following sub-sectors: commercial banking, investment banking, development banking, asset management, securities trading and distribution, insurance and NBFCs. Unification in the shape of cross-over between banking and insurance and the emergence of bancassurance is a case in point.
Customer Centric Approach
Exposure to global practices has made the Indian customer more discerning and demanding. There has been a clear shift towards those entities that are able to offer products and services in the most innovative and cost efficient manner. The financial services sector will need to adopt a better customer-centric business focus. It will also have to create value for its shareholders as well as its customers, competing for the capital necessary to fund growth as well as for customer market share.
Engage in multi-pronged strategies for expanding economic opportunity
A firms’ primary focus should be to develop inclusive business models that make those services widely accessible. Constraints in the system however mean that inclusive business models often require complementary strategies to be viable. For example plans to offer financial transactions via mobile phone may require active engagement with governments across countries to align the incentives and policies of financial and telecommunications regulators. There is particularly significant opportunity for commercial banks to play leadership roles in institutional capacity-building, applying their expertise to strengthen entire systems.
Financial services in India still remain largely under-penetrated and there lies the opportunity for high growth. Foreign banks are likely to be allowed to acquire local banks when the next stage of banking reforms is proposed and increased FDI limit in insurance will offer good opportunities in the insurance sector. Low penetration in the pension market makes it a lucrative business segment. India also offers a once in a lifetime opportunity for PE funds to invest in the infrastructure asset class across the board ranging from core sectors such as power, roads, transport to social asset classes such as healthcare, education, environment. Other service economy infrastructure sectors like telecom, ISPs, financial payment gateways also offer massive opportunities.
In the financial services sector, engagement with microfinance institutions, international financial institutions, and multilateral and bilateral donors is common, particularly around microfinance. Large commercial banks have the potential to serve as lynchpins in the dynamic transformation of financial markets to offer expanding economic opportunity to the poor. While individual firms must naturally choose the strategies most appropriate for them, strong collaboration capabilities will almost certainly be essential – both within the financial sector and beyond.
Anticipate best practices in Regulation
The changes in the financial services landscape have taken place against a wider systemic backdrop of easing of controls on interest rates and their realignment with market rates, gradual reduction in resource pre-emption by the government, relaxation of stipulations on concessional lending and removal of access to concessional resources for financial institutions. The financial regulatory system in India today is far more conscious and better equipped, institutionally and legally, to demand and enforce necessary disclosures and compliance with laid norms for protection of the users of the system as well as the credibility and efficacy of the system itself.
As the financial services sector players of the future will emerge larger in size, technologically better equipped and stronger in capital base, one can only hope that the regulatory as well as the self regulatory mechanisms will match up to the best worldwide thereby ensuring that the health of the Indian financial system is not only preserved but improved upon and its ability to withstand shocks, which are inevitable with global integration, remains strong.
Author views are personal.