TOP THREE CHALLENGES IN INDIAN FINANCIAL SERVICES

To enable India’s journey towards a USD 5 trillion economy the financial services industry needs to work with the stakeholder ecosystem to address three key issues – bridging the credit gap, digital innovation across the financial sectors and a focus on building ESG into the financial system. Let us look at each one of these issues in detail.

The ability of the financial services sector to operate effectively and efficiently is critical to the socio-economic growth of any country. Focusing on financial inclusion is critical for India as it will help unleash creative capacities in addition to augmenting domestic demand on a sustainable basis, ultimately having a multiplier effect on the economy and helping India achieve its goal of becoming a USD 5 trillion economy.

To enable India’s journey towards a USD 5 trillion economy the financial services industry needs to work with the stakeholder ecosystem to address three key issues – bridging the credit gap, digital innovation across the financial sectors and a focus on building ESG into the financial system. Let us look at each one of these issues in detail.

Addressing the credit gap – The credit-to-GDP ratio in India has always lagged behind and is a key reason for the slow economic growth of the country. In recent years, it has been hovering around the mid-50s (in comparison to advanced economies which fall in the range of 85+). To enhance the credit-to-GDP ratio the policy makers need to open up alternative capital sources for public sector banks and address the credit gap faced by MSMEs.

High dependance on public sector banks – State-owned banks account for nearly 70% of assets in the nation’s banking sector. This heavy involvement of state-owned banks in the public sector distorts markets, making it difficult for India to address financing gaps in key areas of development such as infrastructure, small and medium-sized businesses, and housing. These banks are reliant on the government for funds due to their limited ability to tap the capital market. However, the government has little room to set aside money for these banks and has been able to fund only parts of the total capital requirement. The government hence needs to unlock alternative capital infusion avenues for PSU banks.

Credible underwriting data for MSMEs – There is a stark credit gap among the micro, small, and medium enterprises (MSMEs) – which are one of the backbones of economic development in India. There are over 6 crores MSMEs in the country contributing to roughly 30% of the GDP and employing over 11 crore people. Unfortunately, as per World Bank and International Finance Corporation estimates, Indian MSMEs account for a credit share of a mere 6–7% and face a credit gap of nearly USD 400 billion with formal lending sources addressing only USD 150 billion of the financing needs. Unless this credit gap is addressed, the ability of the Indian economy to grow at the expected rate will be severely hampered.

The digitalisation of the India economy through India Stack, specially through the Open Credit Enablement Network and the Account Aggregators licences, will help address part of the puzzle, but the stakeholder ecosystem will have to work harder to build additional data rails to ensure transparency across the value chains of MSME business to provide timely and necessary insights for credit underwriting and risk management.

Push towards innovation – With India Stack, the government has laid the foundations of a digital economy. This momentum needs to be sustained. FinTechs and private sector banks have accelerated the innovation around digital; however, barring a few leading public sector banks, others lag behind when it comes to digital native propositions. Given that 70% of the market share belongs to public sector banks, these banks need to be incentivised to aggressively drive the digital agenda to enhance efficiencies, scale and reach across the spectrum for sustainable growth.

Driving ESG beyond the regulatory minimum – The other key challenge for India is to drive sustainable growth around environmental, climate and social paradigms. Financial service providers will need to work to bring their economic objectives into harmony with the new ESG rules and regulations, and change their business models. Financial institutions need to go beyond the regulatory minimum, starting with their own strategy, to stand out from the competition and pioneer new business areas.

Addressing these three key challenges will enable India’s financial services sector to be more inclusive, more tech-enabled and have greater operational effectiveness. The convergence of financial services and emerging technologies along with a focused ESG programme will be critical to build a robust digital economy and lead India’s transformation.

-       Bfsi ET