April 07, 2017
In the era of bad loans, loan waivers and rampant non-performing assets (NPAs), Indian banks are stuck in an ever-increasing gridlock of problems. Our economy continues to linger in the deleveraging cycle as banks try to sell off loan collaterals due to the lack of debt paying capacity from borrowers.
Meanwhile, in the financial startup ecosystem, there are companies that are revolutionizing how we deal with money. There has been an increasing focus on mobile payments, payment banks, Online SME lending, blockchain and other financial services companies in the robo-advisory and stockbroking. This ecosystem of startups has been scaling up much faster than their traditional counterparts. For instance, financial inclusion is a theme that is very relevant in India and remains the governments’ agenda for decades. The traditional mechanism of reaching the unbanked villages and people was by encouraging banks to open branches in rural areas, funding microlending institutions to expand their operations, and incentivizing mutual funds to do business in tier 2 and tier 3 cities. This has had a limited penetration in the past as the banks and financial institutions have to adopt an asset-heavy model to enable wider coverage. They have not been able to leverage technology efficiently to reach the remote areas in rural India. The gap if being filled by digital payment companies. Modi government’s demonetization move has served as an unexpected boost to most of these fintech companies like Paytm, Mobikwik which have spent money rapidly and experienced an unprecedented growth in their user base. India is the second largest smartphone market in the world and enabling financial inclusion through mobile devices just makes it exponentially more effective. In effect, these companies are increasing the acceptance towards all sorts of online payments. It is their success that paved the way for NPCI’s introduction of UPI which allows the transfer of funds between banks and works like a mobile wallet. Recently, the Reserve Bank of India has allowed Mobile payment companies to access the UPI platform too. These seamless solutions allow users to spend money without any hurdles like before. As a result, it creates an encouraging environment for businesses from other sectors to try new things.
SME lending platforms like Capital Float are gaining traction as they provide short-term finance to small businesses which are generally starved of growth capital. It helps small entrepreneurs to finance their working capital and deal with the credit cycle that exists in B2B business environment; albeit at higher interest rates. It helps increase the flow of credit where it is most needed. Other startups help people invest their hard earned money into mutual funds.
One area where there is an acolossal opportunity for expanding financial inclusion is the stock market investment platforms. Currently, only up to 0.2% of the Indian population actively trades in the stock market and approximately 2% of the total population have demat accounts. Whereas in China the total equity participation is 10% and in USA the long-term average is 45%. Financial investments are becoming widely accepted and new age investment platforms could help expand this further. Ideally, as a country develops, it is most beneficial if households and individuals invest their capital in equity markets. In hindsight, such investments would’ve given the highest returns when compared to any other asset class. It would’ve also increased the capital formation of our society and thereby the spending capacity of our population in the long-run.
This article is contributed by Mr Tejas Khoday (Co-Founder & CEO, FYERS), An innovative online trading & investment platform).