Private sector financial companies in India are being powered by twin engines of long-term growth. The first is the structural growth opportunity, as the nation’s embrace of consumer finance, auto loans, mortgage finance, credit cards and digital payments - traditionally among the lowest in Asia - increases alongside income levels. The second area is market share, where we think private sector firms can continue to make inroads against less-efficient state-owned financial companies.
In the near-term, the current wave of Covid-19 infections is distressing given its high infection rate and mortality versus what we saw last year. This is bringing significant challenges to India’s healthcare system and the economy in general. However, in the absence of stringent nationwide lockdowns that had a disproportionate impact on lower income and migrant workers last year, the economic impact has so far been lower. While the situation is still evolving and we stay alert to any signs of worsening, we believe the impact will be temporary and the economy should recover as the infection rate subside.
India’s fundamentals remain solid. For example, the financial sector and banking system offer good grounds for being constructive. Banks are in better shape now versus last year, with ample liquidity - most have already raised capital and their deposit mobilisation has been decent, which should help provide a buffer for economic stress brought on by the pandemic.
Taking a longer term view of trends reshaping India’s financial sector, we note how the growth of digital payments has accelerated at a robust pace in the last 7 years, led by the adoption of so-called UPI (Unified Payments Interface) and IMPS (Immediate Payment Service). Both are real-time digital payment systems used in India on mobile devices, especially for person-to-person and business-to-consumer transactions.
As shown in this week’s Chart Room, India’s digital transactions have surged from 4 per cent of all retail transactions in 2015 to more than 60 per cent year-to-date, with a corresponding decrease in cash usage.
Meanwhile credit cards continue to be underpenetrated in India - only 4 to 5 per cent of the population owns credit cards and they comprise only 2 per cent of total transaction volumes. This segment also offers strong growth ahead, driven by increasing penetration and digitization. We expect the consumer base to expand from 30 million users to 100 million in the next 5 years.
As in other sectors, when it comes to digital payments and private-sector financial companies, we continue to focus more on the medium to longer term prospects for firms in India. We remain optimistic about the structural drivers of growth - strong demographics, under-penetration of consumer goods and services, increasing urbanisation, and growth in the educated workforce.