‘Impact of Covid on banks to play out over 12-18 mnths’
The access to information online and ease of transactions has supported the rise in financialisation of assets, says AKASH LAL, senior partner, Mckinsey & Company. In an interview with
Ashley Coutinho, he says banks will need to increase productivity by 25-30 per cent to reach pre-covid levels of profitability. Edited excerpts:
In 2020, India moved up to ninth place in Mckinsey’s Asian Capital Market Index. What factors were responsible for the improvement?
We identified a few key trends that contributed to the improvement. First, private equity investments have quadrupled in the last five years, with the number of annual deals rising from 588 in 2016 to 917 in 2020. Secondly, the Indian bond market, while underdeveloped compared to global peers, crossed $100 billion in 2020. The access to online information and ease of transactions has supported the rise in financialisation of assets and the growth of mutual funds (MFS) and equity markets. Finally, in 2020, equity flows from foreign portfolio investors (FPIS) remained robust, with investments of $23.7 billion between December 2019 and December 2020 even as other emerging markets (EMS) witnessed outflows. India remains a preferred choice for FPIS owing to the prospects of better economic growth.
What steps should India take to deepen its capital market?
As of 2019, Indians held 63 per cent of their personal financial assets in the form of cash, deposits, and savings accounts, compared with 16 per cent in the US and 35 per cent in Europe. India should sustain the long-term growth of mutual funds by widening MF distribution, particularly in tier-2 and tier-3 cities. The role of private equity can be enhanced. The country has to accelerate the rate of disinvestment in public sector companies, which have risen from $15 billion during 2004-2014 to $40 billion during 2014-2019.
A Mckinsey analysis earlier this year said Indian banks could withstand trillions in credit and revenue losses for the next few years. What is your assessment of the sector now?
The Indian banking sector has shown great resilience through the Covid-19 crisis. The full impact of the crisis in terms of credit losses and associated revenue losses, however, will play out over the next 12-18 months. Sustained low interest rates will also impact banks’ net interest margins, which have been cushioned so far by the inflow of cheap deposits into the banking system. Banks will need to increase productivity by 25-30 per cent to continue at pre-covid levels of profitability.
What are the key trends that you see playing out in the PE space?
India has been one of the largest recipients of PE capital with investments quadrupling in the past five years to $37 billion in 2020. Of this, about $10 billion has come in the form of venture capital investments. The number of unicorns has more than tripled from 10 to 36 in this period, and Indiafocused dry powder remains healthy at $8 billion. All this indicates that capital is available for high-quality
deals and can be a key driver of growth.
The participation of retail investors has grown significantly during the pandemic. What do you make of this trend?
The increase of retail participation in equity markets is a global phenomenon, which has accelerated during the pandemic. What is interesting to note is that the number of retail investors participating through debt funds has also seen a surge. The value of debt fund assets under management from retail clients surged to $57 billion by March 2021 from $48 billion at the beginning of the pandemic.
Could you tell us about the pace of ESG (environmental, social, governance) adoption in India?
“FOR ESG INVESTING TO ACHIEVE CRITICAL MASS IN INDIA, IT IS IMPORTANT TO STANDARDISE ESG TAXONOMIES AND MANDATE PUBLIC FUNDS TO ENHANCE EXPOSURE TO ESG SECURITIES”
India’s sustainability funding requirements to mitigate climate change could be higher than $2 trillion by 2030. For ESG investing to achieve critical mass in India, it is important to standardise ESG taxonomies and mandate public funds to enhance exposure to ESG securities. Companies should build awareness around ESG benefits, improve ESG performance tracking, simplify regulatory reporting and broaden the ambit of ESG investing to include smaller and mid-size companies.