Opportunities from the reset in

Financial Services Sector in India

-July 2017-
 Ambit Pvt. Ltd.

Introduction
The financial services sector in India has undergone a major reset over the past 18 - 24 months. A combination
of policies and regulations by the central government and the Reserve Bank of India have helped provide bank
accounts to over 270 Mn new account holders with 210 Mn new debit cards, initiated direct benefit transfer
subsidies into these accounts, saw the setting up of 23 new banking institutions in a country which only had 18
private sector banks hitherto, a massive push on asset quality and non-performing assets, enabling easier and
more technology enabled KYC procedures, creating of a first of its kind mobile payments network (UPI / BHIM)
and of course all of this capped by the demonetization of 86% of the outstanding currency in November 2016.

Each one of these changes on a stand-alone basis is significant and has potential for significant long term
benefits. Cumulatively, and that too in a short span of 18 months, it’s hard to fathom how deep and far
reaching the effects will be. But such a big change does not happen without disrupting the current ways of
doing business and consequently certain business models. The jury is still out on who will be the disruptors
and disrupted – with capital markets backing both newly started technology oriented start-ups as well as old
generation financial institutions that have built trust with their customers over decades.

The key themes that we see emerging from these changes:

1. Shift in the savings pattern to
financial savings with potential
of up to $ 600 Bn to flow into
equities, mutual funds, insurance
and other financial instruments –
an increase of c.3x* compared to
the flows over the last 5 years
Provides impetus for companies in
asset management, life insurance
and retail brokerage
*c.3x: Close to 3 times
2. Big boost for digital payment 3. Opportunity for well
systems with potential for up to capitalized private sector
$1 trillion of transactions to be financial institutions to grow at
processed digitally in 4-5 years, 25% over the medium term.
a growth of 4x times over current Potential for private sector to raise
levels. over US$ 5 Bn over the next 18
months
Increasing partnerships between
the traditional financial services Public sector banks led
providers and the fin tech consolidation driven by asset
companies that will have the quality and need to enhance
ability to scale up at exponential efficiency
pace and freedom to experiment
with new processes and appraisal
systems
Increasing interest from global
strategic and financial investors
in partnering with fin tech
companies with strong platforms,
established distribution networks
and demonstrated unit economics

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

I. Reset in the
financial services sector
The government and the banking regulator have been relentlessly introducing incremental and transformative
changes in the financial services systems. The common theme has been to provide access to financial services
to the under-banked and to bring greater proportion of transactions, savings and credit into the formal
systems, away from cash and unregulated informal markets.

Recent regulatory initiatives for transforming the financial services systems in India

JAN DHAN YOJNA DIRECT BENEFIT TRANSFER NPA ORDINANCE

India’s National Mission for
Financial Inclusion to ensure
access to financial service
By 1 June 2017, over 280 Mn
bank accounts were opened and
Rs. 638 Bn were deposited under
the scheme
Transfer subsidies directly to
the people through their bank
accounts
74 Schemes of 17 ministries of
central government were under
DBT by May 2016
President of India signed
an ordinance in May 2017,
amending the Banking
Regulation Act that grants RBI the
power to invoke the insolvency
and Bankruptcy code for banks
in cases of defaults

DIGITAL PAYMENTS INTERFACE NEW BANK LICENSES DEMONETIZATION

Interoperability from different
bank accounts and wallets
Smartphone driven P2P transfer,
delinking payments from bank
accounts
From 17 private sector banks till Demonetization of Rs. 500 and
2 years back... 1,000 notes comprising 86% of
10 small finance bank licenses the currency
11 payment bank licenses
2 private sector banks
Banking licenses now ‘on-tap’

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 Ambit Pvt. Ltd.

These changes
may drastically
impact
how consumers
interact with
institutions
and consume
financial services
and products

A key component of the changes has been to facilitate the access of mobile based payments in India. This has
included initiatives like BHIM, BBPA and most recently Bharat QR, a first of its kind inter-operable QR based
payment acceptance system.

BHIM (Bharat Interface for Money) is a mobile app developed by National Payments Corporation of India
(NPCL), based on the United Payment Interface (UPI). The app supports all Indian banks which use the UPI
platform and allows the user to instantly transfer money between the bank accounts of any two parties using
mobile devices.

BharatQR code,is the world’s first interoperable payment acceptance solution and was launched in March
2017. Initially, limited to participating banks, may be extended to payment wallets later.

BBPS (Bharat Bill Payment System) is a regular mandated bill payment system offering interoperable and
accessible bill payment service that follows a common standard across the country. Intitally it would be used
for utilities but plans to cover school fees, subscriptions, government payments etc.

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

The reset in the financial system from the range of policy and regulatory frameworks is likely to have the
following effects for financial services firms:

1. Enhanced base of customers through the Jan Dhan accounts as well as new institutions like payment
banks targeting customers that either did not have bank accounts or were infrequent users of
their accounts

2. Aadhar linked account opening processes along with the Central KYC, which allows records for all
customers to be used by other firms in financial services firms, could have significant ripple effects across
other segments like securities, mutual funds, insurance etc, by obligating the need for multiple KYC and
enabling faster and completely digital processes

3. Linking of Aadhar numbers to transactions would help create a larger base of digital record for
customers with financial transactions and help provide new sources of data to institutions for making credit
decisions

4. Increase in operating efficiencies for financial institutions through reducing the onboarding and processing
costs and helping reduce cost of transactions

5. The digital infrastructure is witnessing a significant evolution across areas like access (through faster
networks), devices (increasing smartphone penetration) and technology (UPI)

“Within financial savings, fixed deposits have been the

instruments of choice accounting for over 50% of the total
financial savings till FY15. The decline in interest rates has
started the initial shift away from fixed deposits into other
financial instruments including debt / equity mutual funds and
insurance. As consumers get more comfortable with other
financial products the shift could become more pronounced
in the long term.”

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 Ambit Pvt. Ltd.

II. Shift of savings to

financial instruments
The five year cycle of 2009-2014 would possibly stand out as one of the most dismal for manufacturers and
distributors of financial products. The period was unpinned by a lack-luster economic environment, high
inflation and increasing interest rates leading to over-all risk-averse attitude among investors. This led to a
sharp shift in savings away from financial assets to physical assets

As a percentage of overall savings, the share of physical assets grew from 48% in FY2007-08 to a high of
69% in FY2011-12, and stayed as high as 60% in FY2014-15. This is contrary to the general expectation of
increasing share of financial assets as the economy becomes more mature and income levels rise. Within the
declining share of financial savings, the share of incremental savings moving towards capital markets asset
classes like shares and debentures witnessed significant contraction from 12% in FY2008 to 2% in FY2012
and 4% in FY2014

Fig. 1: Reducing Allocation to Physical Assets Fig .2: Incremental flow of financial Saving

69%
66%
64%
60%
52% 14%
48% 18% 21% 15% 19%
26%
40% 12% 2% 4%
5% 7%
5%

57% 56%
52% 44%
47% 42%

9% 11% 10% 11% 9% 13%

FY08 FY10 FY12 FY13 FY14 FY15 5 year
target FY06 FY08 FY10 FY12 FY14 FY16
Provident and Pension Funds
Investment in physical Assets (% of Household Savings) Claims on Government Deposits
Insurance Funds Share and Debentures Currency
Source: RBI, Ambit Estimates

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

The underpinnings of the shift were largely on account of high

inflation and interest rate scenario which prompted the shift to
physical assets and bank deposits.
Potential for US$
The pick-up in equity markets in FY2015, witnessed a surge in 500-600 Bn to flow
the stock markets and consequently resulted in a strong flows
in to equity markets, mutual funds and insurance. The period into financial savings
also witnessed a decline in inflation rates, initiation of reduction over the next 5 year;
in interest rates and pick up in primary issuance market – all
factors critical for growth in financial savings. The immediate nearly 3x growth over
impact was visible in share of shares and debentures in financial the previous 5 years
savings increasing to 7% in FY2016 from 4% in FY2014, as
well as in the increase in the equity AUMs of mutual funds,
subscriptions to schemes by portfolio managers and new
business premiums of life insurance.

The trend was reaffirmed in FY2016 despite being a flat year for the stock markets, the flows in equities,
particularly the equity mutual funds continued, suggesting a return in the investment appetite for investors.

The regulatory and policy initiatives over the last 12 months have resulted in greater money flowing into the
banking system and reduced the attractiveness of real estate and gold as investment avenues through the
major clampdown by the government on the parallel economy. As a result of these initiatives, there is a
significant scope of sustained increase of flows away from physical assets and into financial savings.

Real estate and gold, the two big gainers in the last 5-7 years are likely to witness lower returns and
unwinding of positions

The inflow of money into the banking system to keep interest rates subdued, making banking deposits
less attractive

New entrants to the banking system who will look to offer more attractive rates to depositors and
will thus need to construct more sophisticated deposit products, such as setting up deposit linked
products, in partnerships with asset managers and insurance companies

Increasing supply in the equity capital markets through government divestments and listing of financial
investors backed companies

Assuming 60% of household savings shift to financial saving of this 40% flow into capital
markets, mutual funds and insurance, this could result in c.US$ 570 Bn of flows over the
next 5 years, compared to US$ 200Bn over the last 5 years an increase of nearly 3x

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Fig. 3: Equity Mutual Fund AUM Inflow

740
710

-93
-146
FY12 FY13 FY14 FY15 FY16
Equity Mutual Fund Inflows (INR Bn)

Fig. 4: Equity AUM In PMS Fig. 5: Life Insurance Premiums

808
1,750

590 1,387
507 1,142 1,196 1,131
1,070

296
205 212

Mar’12 Mar’13 Mar’14 Mar’15 Mar’16 Mar’17 FY12 FY13 FY14 FY15 FY16 FY17
Equity AUM in PMS (INR Bn) Life Insurance Total New Business Premium (INR Bn)
Source: SEBI, IRDA, AMFI.

Apart from where this large pool of financial saving will flow to, the other interesting development to watch
is going to be how it flows there.

The emergence of new entrants in the financial services landscape, all looking to differentiate in a competitive
market place, could also be the conduit for channeling the financial savings into capital market products.

The sheer scale of the market opportunity along with wide divergence in customer preferences and requirements
provides opportunity for multiple models to emerge and win. The rapid developments in the fin tech space
(more on that later in the note), and combination of high quality product, backed by robust risk management
systems and ability to offer a high quality and intuitively engaging experience to customers could emerge as
some of the critical aspects of the winners and disruptors.

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

III. Rise of digital financial services

Financial institutions have traditionally been big adopters of technology which has paved the way for providing
faster and more efficient financial transactions as well as providing ability to offer financial products to a
larger population while managing risk. The advent of the new private sector banks in the 1990s was the first
phase of disruption as the new age banks disrupted the incumbent position of the public sector banks through
use of technology to provide more efficient services to customers.

At the retail level however, the key challenge remained development of an ecosystem for consumers to access
the products and services through digital means, given the low penetration of information systems and
communication technology. The quantum jumps in the mobile telecom infrastructure and increasing use of
smartphones are allowing enhanced access and ability to offer financial products and services in a more cost
effective manner.

JAN DHAN YOJANA Aadhaar Mobile

Fig. 6: Fig. 7: Fig. 8:

J Total balance of INR 638 Bn. A Electronics of identification and J Steep rise mobile penetration
Share of zero balance accounts biometric data
came down to 24%
1,140
280

370
1,049
244

927
219

88%
190
185

240
680

80%

220
161

72%
541

159

146
59%

110
250

43%

82
54

42
19

2012 20%
Sep-14

Sep-15

Sep-16

Mar-17

2013

2014

2015

2016

Apr-17

2013

2014

2015

2016

Bank account (Mn) # Cards (Mn) Mobile Internet users (Mn)

Debit Cards (Mn) Penetration 3G users (Mn)
Source: PMJDY, TRAI, RBI.

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 Ambit Pvt. Ltd.

Early signs indicate increasing levels of comfort for customers in using mobile
based payment mechanisms

Fig. 9: Payments Mix By Value (2015A) Fig. 10: Monthly Transaction Value (US $Mn)

Card 1.124
Digital(3) 7.0%
13.0% %
: 9.5
GR
y CA
Other
nthl
Paper Mo
2.0%

36
Cash
78.0% Jan Mar
2014 2017

Large untapped market of cash Exponentially increase transaction value of

transactions mobile wallets

Fig. 11: Volume Of Electronic Payments Mix

Jan 2014 Mar 2017 Debit cards

Mobile Banking @ POS
8% Mobile Banking
16% 39%
m-wallets
9%

m-wallets
27%
Debit cards
@ POS
Credit cards 45%
@ POS Credit cards
38% @ POS
18%

Share of mobile transaction volume triple in 36 months

Source: RBI

The digitization initiatives have been given a significant boost with the recent government initiatives for
promoting digital payment systems, including by the demonetization of the Rs1,000 and Rs 500 notes on
November 8, 2016 and remonetization of the currency at lower levels pushing consumers and merchants to
use digital payment mechanisms.

The growth of mobile payments in China presents an interesting case study for the Indian markets. The levels
of internet and smartphone penetration in India are comparable to those in China 5 years back.

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

Today Today 5 Years Back

1 LITERACY RATE 72% 96% 95%

2 INTERNET 27% 50% 34%

PENETRATION

3
SMARTPHONE
PENETRATION 25% 69% 15%

4
INTERNET SPEED 4.1 / 25 Mbps 5.7 / 8.9 Mbps 1.0 / 1.8 Mbps
(WEB/MOBILE)

RETAIL E-commence
5 US$ 13 Bn US$ 660 Bn US$ 27 Bn
SALES

The scale up of the access through internet and smart phones over the last five years facilitated a 153% CAGR
in growth of mobile payments for banks and 193% for non-bank mobile platforms.

Fig. 12: China’s Mobile Money Market (US $Bn) Fig. 13: Increasing Share of 3Rd Party-Mobile
Payments(1)

2010 Breakdowm
Banks-Mobile Payments CAGR
(2010A - 2014A) : 153.1% 3rd Party Mobile
Payments
3rd Party Mobile Payments CAGR (2010A): 192.7% 8%
Banks Mobile
Payments
91%
3,629

1,495 2014 Breakdowm

3rd Party Mobile
Payments
668 16%
358 Banks Mobile
88 9 154 189 Payments
12 23 84%
2010A 2011A 2012A 2013A 2014A

Banks-Mobile Payments
3rd Party-Mobile Payments

The China case study also supports the thesis of co-existence of multiple formats across both banks and non-
banks in the payments systems.

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 Ambit Pvt. Ltd.

India digital payments growth outlook.

While at a nascent stage, the digital payments market (comprising debit/credit card payments at POS machines,
mobile banking payments and other pre-paid instruments including mobile wallets) have grown from c.US$
31* Bn in FY2012 to US$ 129 Bn in FY2016, registering a compounded annual growth rate of 43%. The
strong trajectory has continued in the current fiscal year, with monthly payments amount increasing from
US$14 Bn in April 2016 to US$ 22 Bn in October 2016. Demonetization gave a further fillip, with transaction
value increasing to US$34 Bn in December 2016.

Estimations on the depth of the market opportunity for the digital / mobile payments businesses have been
constrained with the lack of reliable estimates on the actual size of the total cash payments market. Considering
the total consumption numbers for the country (c.US$ 1.5 trillion for FY2017 e*) as a proxy for payments
market would indicate that digital payments comprise c.17.5% of the total payments market, up from c.9.5%
in FY2016.

Fig. 14: Digital Payments (US$ Bn) Fig. 15: Digital Payments 2017 Growth

310 9%
at e- 10
w th R
ro
8% ly G 11 12
-5 nth
R Mo
CAG 9 9

8
6

129 6 6
6 6
6
70
39 47
31
8 10 11 11 11 16 18 21 23 22 20 27

FY2012A FY2013A FY2014A FY2015A FY2016A FY2017A Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Digital Cards

*c.: Close to; e: estimate

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

ESTIMATING MARKET SIZE FOR DIGITAL PAYMENTS

FY2016 FY2017 FY2022e

GDP 2,251 2,458 4,331 Potential for the
Consumption 60% 60% 60% digital payments
Total payments
Market
1,351 1,475 2,599 market to grow
Digital payments 125 295 1,040 4x over the next
% to total 9.3% 19.8% 40%
Implied CAGR of the
5 years to reach
29%
next 5 years US$ 1trillion by
Source: RBI | Note: Digital Payments is defined as the sum of transaction values through
PPIs, Mobile Banking and Credit & Debit Cards at POS FY2022

Technology transforming the payments sector….

A key challenge in India for the wide scale adoption of non-cash payment mechanisms has been ability to use
the card based payment instruments for payment to merchants. While there are over 770 Mn debit cards and
27 Mn credit cards issued in India, the total number of POS machines is only around 1.5 Mn. Given most
large scale establishments have multiple POS machines, the likely number of merchants accepting non-cash
instruments are expected to be around 700,000 - compared to an estimated total merchant network of over
35 - 40 Mn.

A key challenge in growing the base of merchant networks has historically been attributed to the cost of POS
machines, high transaction costs on the payments networks and lack of focus by banks in pushing the growth
of digital payments – in additional to innate preference for cash by consumers. The exponential growth of
mobile wallets in recent times has helped create alternative mechanisms to overcome the challenges. The
initial focus of the mobile wallets was on providing solutions for online payments. However as they looked
to increase the use case for the customers, the use of QR code has emerged as a low cost and efficient
mechanism for broadening the scope of digital payments. While at a relatively initial stage, it is estimated that
the number of merchants accepting mobile payments through scanning the QR code has already increased to
over 1 Mn and increasing at a rapid pace.

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Rollout of the Bhart QR code, which has been launched in partnership with 15 banks along with MasterCard,
Visa, American Express and Rupay could provide the next big fillip to growing the mobile based payment
systems. As an interoperable system, and in the backdrop of increasing customer acceptance for using mobile
based payments systems, this could further help in acceptance of non-cash payments by merchants.

SUPPLY SIDE INITIATIVES PRODUCT INITIATIVES DEMAND SIDE INITIATIVES

Jhan Dhan Accounts UPI / BHIM Demonetization
Payment bank and Small Banks Bharat QR Caps on cash transactions
Centralized KYC and Aadhar Bharat Bill Pay Direct benefit transfer
linkages

What next?

Enhanced requlations (eg. P2P lending, data privacy) ?

Blockchain driven payment systems ?
Sovereign backed digital currency ?

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

Winners in changing landscape

The rapid pace of changes in the payments space has
made spotting winners equivalent to forming a view
on the technology or mechanism of payments that will
eventually become the most widely accepted standard.
Increasing
collaboration
Payments value chain broadly involves 3 legs: the
customer, the merchant and the payment and between the fin
settlement provider, which itself may be split across
multiple banks and payments systems. Faced with a
tech start-ups and
severely underpenetrated market, mobile wallets set up the traditional
a parallel network where they performed all the steps
in the process, from acquiring customers, onboarding institutions including
merchants and being the payments processor. The
speed at which they have managed to scale up the
acquisition of
merchant base for their semi-closed loop payment strategic stakes and
systems bears testimony to the vast market opportunity
that has remain untapped due to lack of focus and costs M&A
that made low ticket transactions uneconomical.

As more customers and merchants come into the fold of digital payments, there could be more focused
targeting of such merchants and consumers, particularly by newer banking institutions, which would be keen
to upsell the wider bouquet of credit, savings and payment products and services.

Customers gravitate to mechanisms they trust, are easy to use and widely accepted. While banks have
the pole position on issues related to customer trust, they had so far been cautious in pushing the digital
payments. In the current context however this could change rapidly. The winners then are likely to be banks,
payment services companies and fin tech start-ups that are agile, innovative and are able to demonstrate
value to customers. The start-ups have the innate entrepreneurial benefit of being able to experiment and fail,
scale up rapidly and be close to evolving technologies. The traditional financial institutions on the other hand
have trusted customer relationships, large balance sheets and access to wide range of products and services.
A rapidly evolving environment could thus form the bedrock for increasing collaboration between the fin-tech
start-ups and the traditional financial institutions

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Broader digital financial product distribution opportunity

Inter-operable technology and

increasing flows through formal
systems will facilitate digitally
distributed financial products and
services

While payments forms the backbone of the financial services sector, the large increase in the scale of digital
payments combined with the shift of household savings to financial instruments, will provide a massive
opportunity to players that are able to successfully combine the same. The relatively low investment amounts
have challenged the economics of building a truly mass market focused financial products distribution
networks, reflecting in the relatively low penetration of products such as mutual funds, direct equities and
insurance. And within this low ratio, the share of online distribution is a miniscule proportion.

Increasing digitization of consumer interface for financial systems combined with increased access and
understanding of these systems could have the potential for the share of digitally distributed financial products
be at the core of the wave of financial savings flowing into the markets.
High end Robo-advisory platforms are already taking on the task of analyzing reams of data to make
investing a one-touch activity, with portfolios customized for individual risk appetite and objectives.
Personal financial assistants are scrubbing through transaction records of customers to recommend better
ways to save and channelize these savings into investments
Increasing volumes of digital payments is helping provide new data on consumers as well as merchants for
constructing customized lending products

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

IV. Consolidation and Capital raising

The last 12 year period witnessed rapid growth in the banking sector during the period till 2013 followed by
steady decline and ending with an all time low growth of 6.3% in FY17.

However, splitting this across sub- segments there is a significant gap among private sector banks and NBFCs,
which together comprise under 28% of the banking sector and the public sector banks. This has also resulted
in a decrease in the overall market share of public sector banks, except for SBI that continues to hold its
position and share.

Given the corporate sector contributes to a significant part of the advances of the banking sector, the slowdown
in new capex and infrastructure projects has been the biggest driver of the slowdown. The reduction in growth
rates also needs to be viewed in perspective of the asset quality and capital issues facing the public sector
banks that comprise over 75% of the banking sector in the country.

Nominal GDP Growth of 12-13% => banking sector growth of 14-15%; Opportunity for
Non-PSU lenders to take disproportionate share and growth at 20-25%

Fig. 16: Credit Growth in India

26.6%
24.2% 23.3%
21.7%
18.6%
16.3% 17.3% 17.2% 105
20.2% 99
14.1% 89
15.3% 13.1% 15.7% 10.6% 11.5%
16.1% 10.3%
13.9% 12.9% 12.2% 12.3
60 10.8%
51 71 81 8.7%
35 42 6.3%
25 31
16 20

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E
Credit (INR Tn) GDF Growth Credit Growth
Source: RBI, Ambit Estimates

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Fig.17: Change In Mix Fig. 18: Gross NPA and Standard Restructured Assets
4% 3% 4% 5% Public sector banks Private sector banks
7% 8%
10% 10%
9%
16% 8% 8% 4.21%
6% 3.31%
6% 6%
7%
14% 3.76% 1.99%
16% 18%
14%

0.79%
4.44% 13.70% 13.38%
11.40% 11.70% 1.32%
52% 60% 55% 52%
7.89%
5.10% 5.04%
0.10%
1.05%
FY05 FY10 FY15 FY16 SBI BoB PNB BoI UBI HDFC ICICI AXIS
PSB Private Bank Foreign and RRB Gross NPA Restructured Assets
Co-op Banks NBFCs HFCs
Source: RBI, Company filings

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

Where will the growth come from?

With the current capital and asset quality challenges for
public sector banks, as well as lending business focused
Opportunity for well-
primarily on the corporate side it will be a while before funded private sector
we see the banks shift focus to be able to pursue growth.
However, over the last few years the better capitalized banks and NBFCs to
and agile private sector banks have continued to register
growth rates of 20%+ and superior return of equity, albeit
grow at 20-25% CAGR
on a much smaller base - both of which are reflected in and increase market
richer valuation multiple attributed to the private sector
banks over their public sector peers.
share

Fig. 19: Nominal GDP Growth of Fig. 20: ... Opportunity For Non PSU Lenders To Take
12-13% => Banking Sector Growth of Disproportionate Share And Grow At 15%+
12%...
Implied CAGR
2%

185 19% 17% Other 11%

-1

0% 1%
GR

10% 16% SFB 30%

CA

18%
NBFC 20%
23%
105
Private 15%
37%
29%
Other PSU Banks 7%

SBI 9%
15% 14%

FY17 FY22 FY17 FY22

SBI Other PSU Banks Private NBFC SFB Other

Source: RBI, Ambit Estimates

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Assuming a gradual pickup in the capex cycle along with the robust market for consumer loans, a nominal
GDP of 12%-13% per annum should conservatively support a 12%+ CAGR for credit market in India.

In light of this, it is a possible scenario that the share of private sector lenders increases from currently around
18% to 23% over the next 5 years.

The biggest beneficiaries are likely to be institutions that have built deep product or distribution capabilities
and have been at the forefront of technology adoption. As the private sector banks gear up to meet the
higher growth targets, they will look to tap additional capital as well as potentially add-on specific product or
distribution capabilities through mergers and acquisitions.

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Opportunities from the reset in Financial Services Sector in India | July 2017 Ambit Pvt. Ltd.

Consolidation in the financial services sector

Any consolidation needs a strong driver for both parties. One of
the major drivers for consolidation in the financial services sector
has been the prospect of being significantly better off as part of a
larger entity versus a standalone one. While access to branches Public sector
used to be a particularly strong reason for the acquiring entity, institutions and
the liberalization of the bank branch opening norms as well as
openness to give more licenses combined with the technology led their subsidiaries
disruption in the manner in which people interact with the banking
sector, has made access to physical distribution networks a relatively and associates
less important factor. could lead the
As highlighted in the above charts [Fig.16 & Fig.18], the sharp consolidation in
decline in the growth rate in the banking sector and the pile up
of non-performing assets has been particularly accentuated for the sector
the public sector banks that were largely focused on corporate
borrowings. The strong focus of the regulators and the Government on cleaning up the asset quality issues,
could likely hamper the resources that some of these institutions will be able to channelize into preparing for
the next stage of evolution in the sector in which technology would be at the heart of the banking practices
and ability to channelize the sharp movement in financial savings will be important for financial institutions to
not get left behind.

In this backdrop, a consolidation in the public sector institutions may become critical for these institutions to
enhance efficiency and combine strengths. While this has been touted as a much-needed solution for many
years, the rapidly evolving environment may finally provide the backdrop for this change. An initial step in
this process could involve consolidation of the many subsidiaries and associate companies offering other
financial products held by the public sector financial institutions, which through combination could provide
more efficient and larger entities, and in the process create greater value for the stakeholders, including the
Government, as well as freeing up capital for core banking operations.

As noted earlier, the series of progressive changes by the Government and the regulator to set up a more
robust financial services sector in India provides the backdrop for exciting changes in the sector. From here
while we could expect continued efforts from the regulators to facilitate the changes that have started, the
onus now lies on the incumbents and the new entrants in the sector to carry the baton and truly optimize on
the opportunities that lie ahead.

22
Opportunities from the reset in Financial Services Sector in India | June 2017 Ambit Pvt. Ltd.

About Ambit
Ambit is a leading investment bank offering customized solutions in the areas of Corporate Finance, Equity
Capital Markets, Institutional Equities, Private Equity, Asset Management, Wealth Management, Structured
Finance and Principal Investment. The firm capitalizes on its strong track record, indepth understanding of
global economic and regulatory environment and extensive domain knowledge to provide seamless services to
its clients, which include institutional investors, corporates and high net worth families. Ambit is headquartered
in Mumbai, with offices in New Delhi, Bengaluru, Singapore, New York and London.

To know more about the report, get in touch with:

Ausang Shukla Meghana Bangalore
Managing Director, Corporate Finance Marketing and Corporate Communications
ausang.shukla@ambit.co meghana.bangalore@ambit.co | +91 98191 20245

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