The Indian Financial Services industry is a proxy to the Indian economy and one of its important pillars to provide lifeline to a large growing need for funds. In the past 10 years, it has grown by leaps and bounds. The entire financing needs of the country have moved from financial institutions to banks, banks to NBFCs and mutual funds.
Currently, there are 10,292 NBFCs registered with RBI and 43 fund houses with SEBI. With more players entering this industry, availability of funds too has increased substantially. Thus, the industry has become bigger and bigger with each passing year.
Over the years, not only has the industry grown but has also attracted higher supervision from respective regulators. As a result, financial savings incrementally moved to these intermediaries, widening the base of their overall size. It also helped bringing down cost of borrowing to the growing needs of consumers.
During the period of 2013-14, interest rates were as high as 8 per cent, however, RBI began to cut interest rates post currency market stability. Mutual Funds played a key role in bringing down the interest rates to borrowers through investment in both money market instruments and bonds.
In effect, transmission of interest rate reduction by RBI was broadly driven by mutual funds lending to corporate borrowers in the form of CPs and Bonds. In a similar manner, the industry has played a key role in equity market stability as well.
In fact, over the years, mutual funds have become a strong counter force for the Foreign Institutional Investors (FII). While the FIIs continue to pull out money, the Indian MFs were pre-dominantly the largest net buyer for most part of 2017-18 and 2018-2019.
NBFCs have also contributed largely in increasing the ‘penetration and reach’ to every nook and corner of the country by providing loans for various needs. A large part of the credit offtake should be attributed to NBFC’s penetration in the country.
With the continuous progress and evolving maturity of the industry, we have come to an inflection point. This inflection point is posing lot of questions on the role of NBFCs and mutual funds. Obviously, when the industry becomes bigger, complexity arises along with the size of industry and its growing related concerns. If I consider the period of 1998, there was a huge rise in the number of NBFC players. In the course of time, while some firms went through their own tough time, some continued to remain strong.
However, some of the players chose to move away from this business not because there were any default, but their risk appetite was less to carry on with the business. A similar event happened in the mutual fund industry during 2008 global credit crisis.
After 2008, while some chose to be in the business and some decided to move out, the industry went through a consolidation phase for a brief period, but revived on the back of strong fundamentals and growing transparency.
In this saga of events, opportunity, changes and volatility have remained constant in the entire space of financial services Industry.
While all this is true, human sentiments and behavior also keep fluctuating based on many global and local factors. In these scenarios, a question arises in everyone’s mind is whether one should panic and jump off the ship or should one stay on course to be part of the market.
In my 28 years stint in this industry, I must say, given the fact that the Industry is getting matured and is well regulated, it is prudent to stay committed to one’s investments and have confidence in the larger system. While some unexpected events may put a question on the fundamentals of investing and risk monitoring of the MF industry in general, it is also equally true that phases like now create higher noise levels, thus creating panic among investing public including money managers.
However, events arise out of nowhere and have a brief level of noise where we see the risk in hindsight. But it is for sure, these unexpected events, as it has happened in the past, will also get addressed along the way meticulously. While the concern is obvious and different people may have different points of view, given the way things have shaped up in the past, the noise level may stay for only three to six months.
Therefore, the current market noise will slowly get ebbed out, as we see progress in the resolution process collectively undertaken by borrowers, lenders, regulators and legal system.
It is therefore important to stay away from the noises and focus on building business/portfolio along with managing risk to be a winner in the long run.