Date: 23/12/2022

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Financial Inclusion and Financial Sector Reforms.

Key Phrases: Regulated Entities, Fintech and NBFC, Financial Services, Non-Banking Financial Companies, Regulatory Framework, Financial Inclusion, Rising Inflation, Microfinance Institutions, SIP, Customer Protection, Deepening and Widening of Domestic Credit, Retail Sector.

Context:

• India’s economy has emerged as a beacon with 6.8–7.0% growth expected in fiscal 2022-23, even as the world’s largest economies face a slowdown amid rising inflation and pandemic and war-related disruptions.
• While various factors have aided India’s resilience, the financial sector has played a key role.
  • The deepening and widening of domestic credit during this period sustained businesses while providing retail loans to support consumption-led growth.

Key Highlights:

• Nobel laureate Ben Bernanke demonstrated how society might mitigate the impact of a financial crisis through a well-regulated financial system.
• In India, it was a robust digital-age financial ecosystem that kept our credit engine running.
• The financial sector will do well to understand how this works and ensure that domestic credit keeps flowing in the country even as global uncertainties persist.

Boosting Growth through Financial Strength:

• From the onset of the pandemic, our government, regulators and the financial sector came together purposefully to ensure credit continued to flow not just to traditional sectors, but also to newer and more accretive segments such as the Micro, Small and Medium Enterprises (MSMEs).
• Apart from this, retail credit was more readily available to consumers as they emerged from the pandemic to buy and renovate homes, purchase vehicles and consumer durables.

Responsible Factors:

• Financialization of Retail Savings
  • Development in recent times is the financialization of retail savings to bring new capital to equity markets in the form of systematic investment plans (SIPs).
  • In recent months, as foreign capital exited Indian markets chasing higher interest rates elsewhere, incremental retail investor money kept our equity indices propped, provided additional credit and boosted overall economic sentiment.
  • As per data from the Association of Mutual Funds in India, assets under the management of SIPs climbed to ₹6.4 trillion in August 2022 from ₹5.76 trillion in March.
  • Over the past five years, SIP assets have grown 30% annually, twice as fast as the overall MF industry’s growth.
• Combined Effect of Govt Policies and New Age of Fintech and NBFC
  • The success of government policies in pushing growth capital into the system and coming-of-age of constituents like NBFCs and fintech firms have extended the Indian financial sector’s reach through digital means.
  • Recent Reserve Bank of India (RBI) data reveals that bank credit growth accelerated to 17.2% in the quarter ended September 2022 from 7% in 2021.
  • Another noteworthy expansion was seen in the MSME sector, where the loan market grew from ₹31 trillion in March 2020 to ₹36.4 trillion as of June 2022.
  • Retail loans grew 16% in the last year and bank credit to non-banking financial companies (NBFCs) rose by 30.6 % year-on-year.

Way Forward:

• Now, it is clear that India will be best served by a multi-engine credit delivery system where banks, specialized financial institutions and NBFCs, apart from insurance, asset management and fintech firms, will all have roles to play.
• Policymakers and regulators must study their inter-dynamics in detail to ensure credit flows remain robust enough to support growth even in case of global headwinds.
• Enabling and deepening cooperation between key credit sectors such as banking and NBFCs is important, even as we nurture the ability of fintech firms to work in partnership with both.
  • Better sharing of information among the three constituents would be a big step in this direction.
  • In addition, banks and NBFCs will have to make a greater effort to adopt modern data analytics, including alternate data, artificial intelligence (AI) and machine learning (ML), to develop lending products and processes to serve newer segments such as low-income individuals and small businesses.
  • With streamlined AI-driven pre-approval processes, loan rejection rates will reduce and approvals will get optimized.
• India will have to take purposeful steps to encourage credit markets beyond traditional bank and NBFC loans.
• We have to renew our focus on deepening corporate bond markets and secondary markets for debt.
• While households and individuals have entered equity markets in large numbers via SIPs, we should run information and education campaigns to draw them into debt markets too.
• The gradual approach will be needed to tackle future inflationary pressures and currency challenges without sacrificing credit flows.
• The various constituents of our financial sector will have to act like a team to move credit along and lead the country towards its goal of sustained economic growth.

Conclusion:

• India’s economy has exhibited impressive resilience and was supported in good measure by a robust financial sector, which has seen a radical transformation over the years as technology was leveraged and its reach extended, making finance more user-friendly and contributing to a technically healthier ecosystem.

Source: Live Mint

Mains Question:

Q. What were the responsible factors for the robust financial sector for the economic growth of India? Also, suggest measures to keep it up. (250 Words)