BFSI Fund: The banking and financial services sector is not only the largest, but also the most diversified sector in the Indian economy. In the last 2-3 decades, the sector has expanded itself from the bank to other related businesses like NBFC, Insurance, AMC and Capital Market Players. Non-banking now accounts for 45 per cent within the BFSI index. The growth rate of BFSI sector is better than many other sectors. Unlike other areas, BFSI touches the life of almost all the adult population of the country. Products offered by the sector include savings accounts, current accounts, loans, payment solutions, credit cards, online payments, general insurance, life insurance and mutual funds.
1. When someone has income and wants to invest his money in mutual funds, SIP is a financial services product.
2. You can opt for life insurance through a term plan. This is the second financial services product.
3. If you want to buy a house, you can take a loan from the bank. It is also a financial services product.
4. To buy an online product, swipe the card or take a no-cost EMI, these are also financial services products.
Direct impact on economy
Banking and financial services affect your life in many ways. The government expects that the Indian economy will grow by $ 5 trillion in the coming few years. If this happens, the BFSI sector will make a big contribution to it, as it is considered the back bone of the economy. This can be in the form of big credit for the industry that they revive the capex.
Private players are increasing market share
The market share of private players in this sector is increasing. In banking, private banks are gaining market share from PSU banks in terms of loans as well as deposits. In life insurance as well as non-life insurance, private players are gaining more market share in the premium market due to better bank distribution network. We expect this to continue further as PSU units remain weak in terms of capital.
Asset quality is getting better
Concerns about asset quality are gradually decreasing now after RBI’s strictness on the issue of increasing bad loans or NPAs of banks. Most of the big accounts are now in NCLT. Bed loan is being identified or recovery. The corporate book is improving.
Talking about Fresh NPA Formation (slippage), slippages have been moderating in the last few years.
On the retail front, most lenders run a CIBIL test before underwriting and give loans to the same customers who are expected to recover in time. It means to say that due care is being taken now in giving loan. Also, the MSME restructuring after GST has given stretch borrowers some time till the cashflow returns to normal.
Strong balance sheet
Recently, many lenders have strengthened the balance sheet in relation to capital, liquidity and provision buffers. NBFCs have also maintained additional liquidity buffers. There are many of them who are making provision of additional provision buffer in view of any NPA in future. Additional provision is 1-2 per cent of loans with slippages of about 2-4 per cent in the normal scenario.
Why BFSI right now?
Even after the recent boom, the sector is trading below 1 standard deviation (SD) from long term average multiple. At these valuations, the risk reward is quite favorable with strong growth. There is good profit in this sector in the long term. On the basis of economic reform and management commentary, it can be said that the outlook of this sector is positive. Given the strong balance sheet and adequate provision buffer, the sector earnings could grow at 5-15 per cent for FY22-23E.