Aar Shyam (India) Investment Company Ltd Management Discussions.
Global GDP growth is projected to pick up modestly to around 3aV per cent in 2019, from just under 3% in 2018, boosted by fiscal initiatives in the major economies. The forecast is broad unchanged since November 2016. Confidence has improved, but consumption, investment, trade and productivity are far from strong, with growth slow by past norms and higher inequality.
Emerging market and developing economies have become increasingly important in the global economy in recent years. They now account for more than 75 percent of global growth in output and consumption, almost double the share of just two decades ago. The external environment has been important for this transformation. Terms of trade, external demand, and, in particular, external financial conditions are increasingly influential determinants of medium-term growth in these economies as they become more integrated into the global economy. The still-considerable income gaps in these economies vis-a-vis those in advanced economies suggest further room for catch-up, favoring their prospects of maintaining relatively strong potential growth over the medium term.
Indian Economy has been the driving force in the global economy followed by China. India economy grew by 7.3% and expected to grow by 7.5% in 2019. India is closely followed by China where the real GDP growth was 6.3% in 2018 and it is expected to be 6.5% in 2019. The Rest of World Economy is expected at 3 % in year 2019.
The economy of India is the sixth-largest in the world measured by nominal GDP and the third-largest by purchasing power parity (PPP). The country is classified as a newly industrialized country, and one of the G-20 major economies, with an average growth rate of approximately 7% over the last two decades.
The long-term growth prospective of the Indian economy is positive due to its young population, corresponding low dependency ratio, healthy savings and investment rates, and increasing integration into the global economy. The Indian economy has the potential to become the worlds 3rd-largest economy by the next decade, and one of the two largest economies by mid-century. And the outlook for short-term growth is also good as according to the IMF, the Indian economy is the "bright spot" in the global landscape. India also topped the World Banks growth outlook for 2015-16 for the first time with the economy having grown 7.6% in 2015-16. According to the International Monetary Fund (IMF), Indias growth is expected to rebound to 7.3 per cent in the 2018-19 fiscal and 7.7 per cent in 2019-20.
Indian Financial services Industry
Indias financial services sector consists of the capital market, insurance sector, Banking Sector, Cooperative Banks and Non-Banking Financial Companies (NBFCs). Further, the RBI has given license to various companies to set-up of payments bank that is expected to revolutionize the financial sector in India as it focuses to conduct banking activities primarily through mobile phones. As a step forward for the financial inclusion, the Reserve Bank has also given license to various micro-finance companies to setup Small Finance Bank. Banks with a small finance bank license can provide basic banking service of acceptance of deposits and lending. The aim behind these to (Source: PWC report "The World in 2050") provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganized sector entities. The Government of India has introduced several reforms to liberalize, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These measures include launching Credit Guarantee Fund Scheme for Micro and Small Enterprises, issuing guideline to banks regarding collateral requirements and setting up a Micro Units Development and Refinance Agency (MUDRA). With a combined push by both government and private sector, India is undoubtedly one of the worlds most vibrant capital markets.
NBFC Sector (Non Banking Finance Company) Industry:
Indian Financial sector is very diversified and comprises of Commercial banks, Non Banking Financial Companies, Cooperatives, Insurance Companies among others. During the year the Government took several measures to strengthen the financial service sector which includes the New Bankruptcy law, Jan Dhan campaign for financial inclusion, liberalization of Foreign Direct Investment, gold monetization scheme and much more.
There are 11,682 Non-Banking Financial Companies (NBFCs) registered with the Reserve Bank of India out of which a lions share of 98% are non-deposit accepting with the balance 2% being deposit accepting NBFCs. Around 220 non-deposit accepting NBFCs have been classified as systemically important. NBFCs are present in the competing fields of vehicle financing, housing loans, hire purchase, lease and personal loans. NBFCs have emerged as key financial intermediaries particularly for small-scale and retail sectors. With easier sanction procedures, flexibility, low operating cost and focus on core business activity,NBFCs stand on a surer footing vis-a-vis banks.
Non-Banking Financial Companies (NBFC) in India made a humble beginning way back in the 1960s to serve the need of the investor whose financial requirements were not sufficiently covered by the existing banking system in India. The NBFCs began to invite fixed deposit from investor and work out leasing deal for big industrial firms. Initially, they operated on a limited scale and could not make a significant impact on the financial system. However, between 1980s and 1990s, NBFCs gained good ground and started to inveigle a huge number of investors owing to them customer friendly reputation. India Ratings expects NBFCs to account for over 17% of the total credit in the country by FY 2019, compared to 13.1% at the end of the FY 2015 & 9.4% in the FY 2006. Until some years ago, NBFCs were a small part of the financial services business with a small resource base. Today, the equity of leading NBFCs is comparable with or larger than many mid-sized banks. The combined market capitalisation of the top 10 NBFCs is now twice that of mid and small-sized public sector banks.
Expected credit growth in the NBFC sector:
Considering the strong rising trend in credit growth from the NBFCs, its share as a percentage of GDP is expected to grow strongly in the medium term scenario. In case 1, if the share of NBFC credit grows from the current 13% to 33% by 2020 then the compounded growth in the credit during 2016-20 would be 27%. While in case 2, if the share of NBFC credit grows from the current 13% to 25% by 2020 then the compounded growth in the credit during 2016-20 would be 20%.
(Source: Indian Brand Equity Foundation, IBEF)