Understanding the Role of Technology in Transforming Nifty Financial Services and Nifty PSU Bank

 FY22 was spectacular for Nifty—a performance that was heavily lifted by the banking and financial services stocks. Indeed, the majority of banking stocks massively outperformed the market as a whole.

The Nifty PSU Bank index gained a staggering 60% in the past year, while the Nifty Financial Services index rose 22% in this period. But what factors have been fuelling this enormous growth? We evaluate below.



The Rise of Financial Indices

Before we dive into the details, let us outline the breadth of the Nifty Financial Services Index. It is a sectoral index of 20 stocks, which, in addition to banking stocks, includes other financial companies such as housing finance companies, insurance companies, and other financial institutions.

The Nifty PSU Bank index is made up of 12 stocks; it covers public sector banks extensively but has a limited range compared to the Nifty Financial Services index. SBI is the only stock common to both indices.

Banks, especially public sector banks (PSBs), have cleaned up their balance sheets ever since the NPA crisis, bringing down the delinquency rate and transforming their loan books. In fact, since 2018, the net NPA ratio has decreased by 65%, with the capital adequacy ratio rising close to 15%, and banks have been rewarded for this with higher equity performance.

Additionally, with digitalisation becoming the financial mainstay, banks have had no choice but to update their processes, improve efficiencies, adopt new customer-centric technologies, enrich risk management frameworks, and even enter into co-lending arrangements with new-age fintechs. 

So, how has technology revolutionized the financial industry and, in turn, the Nifty Financial Services and Nifty PSU Bank indices?

The Transformative Role of Technology

Banks and NBFCs are performing well due to an expansion of their loan portfolios, a rise in interest margins, and an improvement in asset quality—and technology plays a colossal role in this.

The digitalisation of financial services has facilitated online banking and mobile payments, providing customers with a seamless, efficient, convenient, and accessible experience. 

The deployment of automation and artificial intelligence (AI)/ machine learning (ML) based models by financial institutions has modernised the risk evaluation process. Now, customers with thin credit files can access credit. Even new to formal credit (N2FC) customers can avail of personalised, sachet-sized loans, and such retail loans afford lenders high margins.

Moreover, the advent of fintechs has given a further fillip to the adoption of technology and innovation. Such companies have been experimenting with new products and distribution channels, capitalising on consumers from Tier III and beyond cities. 

Besides, products like buy now, pay later (BNPL) loans have been capturing specific niches. Embedded finance is further improving access to credit. By entering into digital partnerships with these companies, banks are further growing their loan portfolios. 

To illustrate, SBI entered into a co-lending partnership with five housing finance companies in 2022.

Finally, with the India Stack and Account Aggregator system in place, financial companies can now develop a holistic picture of their customer as they get access to all of their financial data, including banking transactions, GST records, tax payments, etc. 

Such open banking initiatives and APIs provide for easy integration of systems between banks and third-party developers, making the provision of financial services easy.

The Bottom Line

Conventionally, the Nifty Financial Services index has mostly outperformed the benchmark index, growing at a 14.9% CAGR versus 13.1% for the Nifty 50. After cleaning up their balance sheets. PSBs are on the rise too, a fact corroborated by the recent rally in the Nifty PSU Bank index. 

This growth can be attributed to the industry-wide adoption of technology that has enabled banks and NBFCs to offer bespoke, high-margin credit products and improve their digital processes for mobilizing more deposits. India’s growth story and demographic advantage offer even more room for growth.

Comments

Post a Comment

Popular posts from this blog

Understanding the Pros and Cons of Sub-Brokers, Discount Brokers, and Full-Service Brokers

Image
  When investing in the stock market, it is critical to choose the right broker. Brokers act as go-betweens for investors and the stock market, making it easier to buy and sell securities. However, not all brokers offer the same services or charge the same fees. This article will look at the benefits and drawbacks of discount brokers vs full service brokers , as well as sub brokers, to help you make an informed decision. Sub brokers are the most traditional type of broker, also known as traditional brokers or full-service brokers. They offer a variety of services, such as research and advisory services, investment planning, and individualised customer support. Sub-brokers frequently have physical offices where investors can meet their brokers in person. Sub-brokers offer personalised service, which is one of their primary advantages. They offer guidance and expert advice to investors, particularly those who are new to the stock market. Sub-brokers perform extensive research and an...
Read more

Comparing the Performance: Reliance vs. Adani - A Share Price Analysis

Image
  India boasts two of the world's largest corporations, Reliance Industries and the Adani Group. With India's economy expanding rapidly, investors are keen to invest in these titans. However, predicting future Reliance share price and Adani Enterprise's share price moves is complex. Reliance has evolved from an oil and gas giant into a diversified conglomerate spanning retail, telecoms, media and new energy. Backed by wealthy investor Mukesh Ambani, Reliance is pivoting towards green energy and high-tech to drive future growth. Its Jio telecoms arm already claims over 420 million subscribers, making it India's largest mobile operator. Analysts expect Reliance to deliver robust revenue and profit growth as its digital and retail units expand market share. Its push into green hydrogen and solar energy also promises substantial long-term potential. However, risks include high debt levels and intense competition, notably from Adani. Most analysts have a bullish outlook and...
Read more

What Investors Should Know About Recent IPO Successes

Image
  In the dynamic world of finance, Initial Public Offerings (IPOs) continue to be a significant event. Recent IPOs have shown varied results, demonstrating the complexities of investing in new market entrants. As companies transition from private to public, they offer investors an opportunity to partake in their growth journey. However, the success of these ventures depends on multiple factors, which potential investors need to understand. Recent initial public offerings (IPOs) provide insight into how companies perceive their market value and future growth. This transition not only injects capital into the business but also exposes it to market scrutiny and investor expectations. The performance of these IPOs reflects not only a company's strength but also the market's appetite for new stock offerings. For example, the IPOs of Northern Arc Capital, Biba, Snapdeal, ESDS Software Solutions, Navi Technologies, and Popular Vehicles and Services in 2023 represent a diverse range o...
Read more