At a time when fears of recession haunt global economies, India’s growth story remains strong. Supporting this growth story is India’s banking and financial services sector. The way this sector is evolving, PricewaterhouseCoopers (PwC) report estimates India could become the world’s third largest banking hub by 2040.

Is it a good time to invest in India’s banking and financial services sector? To answer this question, you first must understand the economics of the sector.

How vast is the banking and financial services sector?

Banking is the lifeblood of an economy as it facilitates and regulates the flow of money in the economy through lending and savings. People deposit money in the bank, and bank lends that money to corporates to do business. Bank also facilitates a payment ecosystem. A smooth-running banking system facilitates economic growth.

Banks are just one part of the money business. Non-banking financial services companies offer services like personal loans, housing finance, insurance, investment management, and broking houses. The sector is tightly governed by several regulatory authorities.

India’s banking system is fairly well developed, with several public and private sector banks, and thousands of urban and rural cooperative banks. The current economic and industrial environment is conducive to the healthy growth of the banking and financial sector.

Coming to the question if you should invest in the banking and financial services sector. Here are five reasons that makes the sector an attractive investment.

1. Participate in India’s fastest-growing economy

India has emerged in the global map as a resilient economy. It surpassed several milestones and one of it is becoming the fastest growing economy among major developed and emerging economies. The World Bank revised India’s 2022-23 GDP forecast upward to 6.9% from 6.5% in October 2022.

2. Benefit from improving banking sector fundamentals

It is not just the economy that is improving. Banks are also improving their balance sheets. The biggest challenge for the sector was the non-performing assets (NPAs), or bad loans. These NPAs were driven by weak private capital expenditure cycle and deteriorating corporate asset quality.

The banking sector has reduced its NPAs in the past few years and provided for most of the legacy NPAs. Putting the worst of the NPAs behind, the banking sector fared well in the RBI stress test, which checks a bank’s financial soundness and readiness to lend.

India’s banking sector now has a strong banking balance sheet, comfortable capitalization level, and adequately provided NPAs. They are well-equipped to benefit from GDP growth.

3. Revival in corporate profitability

Supporting the healthy balance sheets of banks is a revival of corporate profitability in several sectors, especially capital-intensive sectors like metal and pharma. Improved corporate profitability hints that companies can repay their loans, thereby reducing the risk of higher NPAs for banks. This creates a conducive growth environment for banks and the economy.

4. The growth and evolution of fintech

The banking and financial services sector has significant scope of growth through market penetration and digitization makes it possible. The growth of fintech will help the banking and financial services sector tap the large rural market and the growing internet-savvy youth population.

A PwC report expects India’s fintech market to increase at a compounded annual growth rate (CAGR) of 31% by 2025. This growth will be driven by the increasing adoption of FinTech products such as digital payments, embedded credit products, Investment tech and health and life insurance.

5. Government reforms to strengthen banking and financial services systems

Supporting the above four growth drivers are several government policies and reforms. From Pradhan Mantri Jan Dhan Yojana, Aadhaar and Mobile trinity (aimed at providing financial inclusion to all Indians) to the adoption of UPI. Several government and RBI policies support digital banking and fintech.

The government reforms are creating a regulatory environment conducive to the growth of financially sound banking and financial services.

The above five growth drivers have set the stage for a new chapter of growth in banking and financial services.

How to invest in India’s Banking and Financial Services Sector?

As a retail investor, an efficient way to invest in a particular sector is through sectoral mutual funds. You can invest in equity and equity-related instruments of Indian banking and financial services companies and aims to generate long-term capital appreciation.

As a sector-focused fund, it is highly cyclical and carries high risk. But the fund’s predominant exposure to large-cap stocks makes a bounce back faster in a growing economy. The right way to invest in sectoral funds is by making tactical calls (increasing investment in a market dip) and holding for the long term. Another way to invest is through a SIP. It can take advantage of market volatility and reduce your overall cost.

Read more about Invest in SIP.

Invest in tomorrow today !

Aditya Birla Sun Life Banking and Financial Services Fund

(An open ended equity scheme investing in the Banking & Financial Services sectors)

This product is suitable for investors who are seeking*

• Long-term capital growth
• Investments in equity and equity related securities of companies engaged in banking and financial services.

 

*Investors should consult their financial advisers if in doubt whether the product is suitable for them

Reference Links

https://www.pwc.in/assets/pdfs/consulting/financial-services/fintech/publications/the-changing-face-of-financial-services-growth-of-fintech-in-india-v2.pdf

https://www.financialexpress.com/budget/union-budget-2022-banking-sector-needs-a-booster-dose-digitising-bfsi-to-help-overall-economy-2419802/

https://www.financialexpress.com/money/should-you-invest-in-a-banking-and-financial-services-fund-find-out/2275424/

https://www.investindia.gov.in/sector/bfsi-banking

https://www.worldbank.org/en/news/press-release/2022/12/05/india-better-positioned-to-navigate-global-headwinds-than-other-major-emerging-economies-new-world-bank-report

https://www.equitymaster.com/profit-hunter/detail.asp?date=09/07/2022&story=1&title=Indias-Revival-is-Accelerating-Heres-How-to-Profit-from-it

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.