Whalesbook
India's economic secretary calls for the financial sector to adapt to disintermediation, a shift from bank deposits to mutual funds and equities. With banks' share in credit falling and IPO activity rising, the focus is on ensuring finance reaches MSMEs and low-income households, driving overall economic growth through deeper capital markets and improved financial inclusion.
Economic Secretary Anuradha Thakur, speaking at the CII Financing Summit, urged India's financial sector to proactively address disintermediation and financialisation of savings. She noted a significant shift from bank deposits to mutual funds and equities, leading to falling CASA ratios and reduced bank share in total credit from 77% to around 60%. Concurrently, IPO activity has surged sixfold, with corporates increasingly relying on internal resources and market-based funding.
Thakur emphasized the need for collective thinking between industry and regulators to ensure financial flows reach crucial segments like MSMEs and low-income households, positioning the financial system as a key driver of both growth and distributional equity. She expressed hope that recent GST cuts would ignite "animal spirits" in the sector. Challenges for MSMEs, such as delayed payments and limited access to formal debt, were highlighted, with solutions like cash-flow-based lending and technology-driven tools proposed.
The government's reforms, including strengthening bank balance sheets, NPA resolution, and enforcing strict governance and disclosure norms, were credited for supporting India's economic transformation. Digital infrastructure like Jandhan, Aadhaar, and UPI, alongside targeted schemes, have democratized credit access and empowered entrepreneurs.
However, deeper capital markets are needed. The corporate bond market remains dominated by financial issuers, with weak secondary market liquidity. Encouraging more companies to issue bonds through better disclosures and credit enhancement mechanisms is crucial. REITs and InvITs are still considered niche products, requiring further efforts to become mainstream.
The IFSC at Gift City is developing as a global financial hub, supported by regulatory sandboxes. Initiatives like the National Infrastructure Pipeline and National Monetisation Pipeline, along with the NIIF mobilizing substantial funds, underscore the drive for investment.
Sustaining 8% GDP growth requires the financial system to play a pivotal role in channeling savings into productive investments.
Impact
This news carries significant weight as it outlines the government's strategic direction for India's financial sector, impacting investor sentiment, capital allocation, and the competitive landscape. Investors should watch for increased opportunities in capital market infrastructure, fintech, and sectors benefiting from improved MSME financing. The evolving role of banks and the growth of market-based funding are key themes. Rating: 8/10.
Difficult Terms:
Disintermediation: The process of removing intermediaries in transactions, like banks, leading to direct financial flows between savers and borrowers.
Financialisation of savings: A trend where households increasingly invest their savings in financial assets (like stocks, bonds, mutual funds) rather than traditional savings instruments (like bank deposits).
CASA ratios: Current Account Savings Account ratios, representing the proportion of a bank's total deposits held in low-cost current and savings accounts. Falling ratios suggest banks rely more on expensive borrowing.
IPO activity: Initial Public Offering activity, meaning the number of companies going public by selling shares to the public for the first time.
MSMEs: Micro, Small, and Medium Enterprises, crucial for employment and economic growth.
Distributional equity: Fair distribution of economic resources and opportunities across different segments of society.
Animal spirits: Psychological factors that drive business investment and economic activity, related to confidence and optimism.
NPA resolution: Non-Performing Asset resolution, the process of dealing with bad loans.
Governance: The system of rules, practices, and processes by which an organization is directed and controlled.
Macroeconomic management: Policies aimed at managing the overall economy, focusing on inflation, employment, and economic growth.
Direct benefit transfers (DBT): A system to transfer subsidies directly to the bank accounts of beneficiaries.
Account aggregator frameworks: A regulated financial information utility that enables the sharing of financial data with customer consent.
Corporate bond market: A market where companies issue debt (bonds) to raise capital from investors.
Secondary market liquidity: The ease with which an asset can be bought or sold in the market without significantly affecting its price.
REITs (Real Estate Investment Trusts): Companies that own, operate, or finance income-generating real estate.
InvITs (Infrastructure Investment Trusts): Trusts that own and operate income-generating infrastructure assets.
IFSC (International Financial Services Centre): A jurisdiction that provides services to foster international financial business.
Regulatory sandboxes: A controlled environment where new financial products, services, or technologies can be tested under regulatory supervision.
National Infrastructure Pipeline (NIP): A government initiative to ensure world-class infrastructure.
National Monetisation Pipeline (NMP): A government plan to unlock value from brownfield assets.
NIIF (National Investment and Infrastructure Fund): A government-backed investment fund focused on infrastructure in India.
