Crisil Report - Big Shift in Financialisation
Crisil Limited, an S&P Global company, has come out with a report on financialisation trends in India. The report named 'Big Shift in Financialisation' highlights the trends of financialisation in India in the past five years, that is, between March 2017 and March 2022.
The report says savings in the country are being channeled beyond simple bank fixed deposits to risk assets via portfolio managers through investment vehicles, like, mutual funds, portfolio management services (PMS), alternative investment funds (AIFs) and life insurance.
Financialisation is a process whereby investors move away from traditional / physical assets, like, real estate and gold towards financial assets, such as, mutual funds, insurance and PMS.
Financial assets being managed by India's investment industry (Crisil reports terms it as 'Managed Investments Industry') have grown from Rs 63.3 lakh crore in Mar2017 to Rs 135.0 lakh crore in Mar2022, showing a compounded annualised growth of 16.4 percent.
Investment industry in India includes, life insurance, mutual funds, retirement funds (such as, provident funds and NPS or National Pension System), PMS and AIFs.
Reasons for increased financialisation in the past six to seven years include: efforts for financial inclusion, increased digitisation, rise in middle-class disposable incomes and government incentives (like, tax benefits) for the financial instruments.
Increased awareness among youngsters and penetration of mobile apps for easy investing following lower broadband prices have also nudged investors toward financial assets.
Between 2018 and 20222, savers have suffered steep drop in interest rates (for bank deposits, etc.), which forced investors to look for alternative avenues, like, stocks and mutual funds. All these have contributed to increased share of financial assets in household savings.
Pronab Sen, former chief statistician of India, talking to CNBC TV18 on 17Dec2022 on the Crisil report says, "The move by savers from bank deposits to other financial assets, such as, stocks, mutual funds, insurance and PMS, is a threat to economic growth. Funds are moving from a fungible (bank) kitty -- that lend money to a whole range of entrepreneurs, from small and medium enterprises to large corporates -- to a thin layer of capital markets from which only large corporates can access money. The result is more money is being funneled to a smaller group of large entities. Insurance companies and mutual funds provide equity capital only to a select group of companies via IPOs or initial public offers."
Of the managed investments industry, investors are shifting more towards equity products as compared to debt products. The share of equities in investment industry increased from 24 percent in Mar2017 (Rs 15.3 lakh crore of Rs 63.3 lakh crore) to 31 percent in Mar2022 (Rs 41.6 lakh crore of Rs 135.0 lakh crore).
Among the financial assets, bank fixed deposits remain the most preferred financial instrument in the country, though their share has declined over the years, with investors moving towards capital market instruments.
In aggregate, the investment industry with Rs 135 lakh crore of assets has grown at a faster pace of 16 percent CAGR in the past five years (2017-2022) compared with bank deposits, which grew from Rs 108 lakh crore in Mar2017 to Rs 170 lakh crore in Mar2022, clocking a 10 percent CAGR in the same period.
The
Crisil report lauds India's asset management companies or AMCs (mutual
fund industry) for playing a pivotal role in increasing financialisation
in India.
Table 1: Growth of Managed Investments Industry 2017-2022 >
Table 2: Share of Managed Investments Industry in GDP (gross domestic product or national income) >
PMS, AIFs, EPFO and NPS
Over the past decade or so, there has also been a sharp rise in investor flows into big- ticket capital market instruments such as alternative investment funds (AIFs) and portfolio management services (PMS).
As shown in Table 1 and 2 above, India's managed investments industry is dominated by life insurance, followed by mutual funds and provident funds. However, in the past five years, alternative investment funds have been growing at an annualised rate of 50 percent though their share in GDP is only 6.4 percent (Mar2022).
Assets under NPS rose to Rs 7.36 lakh crore as of Mar2022, clocking 33.7 percent compound annual growth rate (CAGR) over five years. Within this, the share of the private sector rose to 20 percent (from 12 percent in Mar2017).
Alternative investment funds (AIFs) and portfolio management services (PMS) require minimum investment of Rs 1 crore and Rs 50 lakh respectively. Increasing formalisation of labour sector is contributing to higher growth of assets under management (AUM) of PFs and NPS.
EPFO and provident funds manage their assets through PMS. Provident fund money accounted for over 80 percent of the PMS industry as of March 2022. It is expected to retain this share and drive growth of the segment over the next five years as the economy gets formalised and more people get employed in the organised segment. Other investors in PMS are high networth individuals (HNIs).
The minimum investment amount required for PMS is Rs 50 lakh. While this amount is less than the minimum requirement for AIFs – Rs 1 crore – the PMS investors pay the whole amount in a single tranche, while AIF investors pay the same in different tranches as and when the capital is called.
Employee Provident Fund Organisation (EPFO) started investing in Indian stocks through the exchange traded funds (ETFs) route in Aug2015. This too has boosted not only the investment industry growth but also the stock market performance.
Going Forward
The Crisil report forecasts the managed investments industry will grow from the current Rs 135 lakh crore (57 percent of GDP) to Rs 315 lakh crore (74 percent of GDP) by Mar2027, showing a CAGR of nearly 19 percent.
However, it is worth noting financialisation of savings and its increasing flow into the managed investments industry has been backed by buoyant debt and equity markets fuelled by excessive liquidity. Any prolonged disruption in the financial markets or liquidity conditions may have an impact on investor experience in future.
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References:
Tweet 19Jun2021 - FM Chidambaram initiated EPFO into investing in Indian stocks via ETF route
Tweet 15Oct2022 - economic reforms are a continuum
PIB press release 26Jul2017 - investment pattern of EPFO funds in ETFs
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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