With India’s banking and financial sectors displaying a stellar performance in FY24 and as India’s financial sector undergoes critical transformation, it must brace for likely vulnerabilities originating globally or locally, the Economic Survey 2023-24 has cautioned.
As per the survey tabled in the Parliament on Monday the government and regulators have to be agile and flexible to intervene with policy and regulatory levers, as required to deal with any eventuality.
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In FY24 bank credit witnessed double digit and broad-based growth and asset quality improved dramatically with gross and net non-performing assets of banks seen at multi-year lows.
“On most counts, India’s financial industry has progressed over time. Domestic credit to the private sector as a per cent of GDP rose from 50.6 per cent in 2010 to 54.7 per cent in 2021. Gross and Net NPAs of SCBs have been declining over time, accompanied by an improvement in CRAR, RoA and RoE. Despite heightened geopolitical uncertainty, India’s stock markets have been stable,” the Survey mentioned.
“Even as banks, non-banks and corporates battled balance-sheet excesses, the consequences of the credit boom of the first decade of the new millennium and the inevitable bust that followed in the second decade, the broad industry kept advancing the cause of financial inclusion and financial deepening,” it pointed out.
As far as capital markets are concerned the primary capital markets during the year facilitated capital formation of ₹10.9 lakh crore (approximately 29% of the gross fixed capital formation of private and public corporates during FY23).
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“The market capitalisation of the Indian stock market has seen a remarkable surge, with the market capitalisation to GDP ratio being the fifth largest in the world,” the survey has mentioned.
Stating that the strategy is for financial inclusion the survey has highlighted that country has placed emphasis on the usage of accounts by enhancing direct benefit transfer flows through these accounts, promoting digital payments using RuPay cards, UPI etc.
According to the survey commercial banks and insurance companies while trying to achieve greater market penetration, must focus on building financial literacy in the country, avoid over lending, misselling and address grievances such that the financial cycle stays healthy as long as possible.
Emphasising that the outlook for India’s financial sector appears bright the Economic Survey stated that the vision of Viksit Bharat by 2047 is indeed an opportunity for a prosperous society, robust financial services sector, strong public finances, and economic sovereignty.
“The elements of a robust financial services sector include a highly competitive and viable banking sector, universal access to banking and other financial services for all citizens, lowest intermediation costs, efficient and quick access to credit and equity funding for small businesses, highly liquid, efficient, and well-regulated stock, bond, and commodity markets,” it stated.
The Survey has suggested that India’s financial sector should support capital formation and promote trade, business, and investments in MSMEs, enabling them to scale and provide insurance protection and retirement security to all citizens.
“The share of insurance and pension fund assets in GDP stands at 19 per cent and 5 per cent, respectively, in India, compared to a high of 52 per cent and 122 per cent in the USA and 112 per cent and 80 per cent in the UK, leaning scope for further improvements,” it mentioned.
As per the survey the next big step in the coming years is likely to be towards Artificial Intelligence/ Machine Learning (AI/ML), Decentralised Finance, Internet of Things (IoT) which have a vast potential to disrupt the digital payments ecosystem.
“Further, the vision is for India to evolve as a ‘fintech nation’ with the highest number of fintech firms and the highest fintech adoption rate by incumbents fuelled by digital public infrastructure. An approach should be evolved for common user data, e.g. KYC, across Regulators, it pointed out.
In the medium term, efforts should be made to move towards data-based lending instead of judgment-based lending, especially for small businesses.
In this regard, there is a need for continuous review to identify regulatory gaps/overlaps and benchmark them with the best global practices. Financial sector firms — public or privately owned — must become customer-centric. Without that, most quantitative metrics will remain elusive, it cautioned.
“The Indian financial sector is at a turnpike moment. The dominance of banking support to credit is being reduced, and the role of capital markets is rising. For a country that aspires to be a developed nation by 2047, this is a long-awaited and welcome development. Being reliant on and exposed to the capital market, however, comes with its challenges and trade-offs,” it emphasised.
