Financialising the economy

The sector is expected to outperform

Even as large parts of the broader Indian corporate world struggle to return to historical levels of earnings, the financial sector appears to be doing so effortlessly. As this newspaper has reported, the share of banks, financial services and insurance, or BFSI, and stock broking in aggregate corporate profits hit a record high, namely 41.5 per cent, during the second quarter, July-September, of this financial year. This is well above its usual level. In fact, it is almost twice the historical 10-year average for the financial sector’s share of corporate profits, which is 21.8 per cent. The 450 companies in the sector that were studied altogether reported an adjusted net profit of nearly Rs 86,000 crore in that quarter. This was an increase of a third over the same quarter in the previous year. It is not only a record high even ignoring the performance of the rest of the corporate world, but it is in fact about three times the previous record profit for these companies prior to the pandemic.
 

The outperformance of financial intermediation is not in general surprising at this moment in time. Banks, for example, have put in some hard work — or were forced to — in order to clean up their books. They thus have to spend less on provisioning for bad loans. Meanwhile, interest rates started rising in response to an inflationary environment in the middle of last year. Banks seized on that opportunity to increase their net interest margins and thereby bolster their income. Broader demand recovery in the economy allowed credit growth also to recover. In the six months prior to the September quarter, the data from the Reserve Bank of India indicated that private-sector commercial banks saw credit growth of 20.4 per cent. Even public-sector commercial banks did reasonably well on credit growth, posting an increase of almost 14 per cent. The flip side of this is that interest-rate hikes are not being passed on to retail savers as swiftly. Banks as intermediaries are thus gaining revenue while borrowers face higher costs and savers are not receiving expected returns.
 

Many market analysts expect the BFSI sector to continue to do well over the course of calendar year 2023. Strong credit growth is expected to continue. Elements of that credit growth may of course be transitory, dependent on the emergence of the economy from the shadow of the pandemic. But there are also long-term trends at play here and those may cause general optimism about the sector. The financialisation of savings is clearly an ongoing process and creates a great deal of room to grow for the sector more generally. The role of financial innovation should not be understated, because it grows access and inclusion and thereby promotes the process of financialisation. The managed investments sector is likely to benefit as a consequence of financialisation; ratings agency CRISIL predicts that its assets will go up to 74 per cent of gross domestic product in 2027, up from 41 per cent five years ago. Given this long-term trend, outsize performance by the BFSI sector is only to be expected. However, policymakers must make sure financial innovation serves the real economy and doesn’t end up being an end in itself.