A huge unbanked population and high mobile penetration offers vast opportunities in fintech.
Financial services investment into India has soared over the past five years, with foreign investors particularly attracted to fintech opportunities in the country despite a slowdown in projects in 2020 because of the Covid-19 pandemic.
The number of financial services foreign direct investment (FDI) projects reached 36 last year (January to November data) from 14 projects five years earlier, according to Financial Times-owned data monitor fDi Markets. The top destination city was the country’s technology capital Bangalore, displacing Mumbai as the destination of choice.
Italian insurance group Generali made 27 investments in the January to November 2020 period as part of an ambitious growth strategy, while Singapore’s DBS Group is undertaking a $342m takeover of local lender Lakshmi Vilas Bank (LVB).
Fintech opportunities
FDI in fintech projects into India saw a marked increase between 2015 and 2019, before dipping in 2020 because of the Covid-19 pandemic. Saswata Guha, an analyst covering financial institutions at Fitch Ratings, said he expected the upward trend to continue.
“One area that has received a significant push, as a result of Covid-19 and the resultant lockdowns, is fintech. The space has gained a lot of momentum as people have been confined to their homes and forced to rely on digital channels.”
A lot of financial services investment has been routed towards fintech operations, particularly in cities with prominent technology clusters – such as Bangalore, Hyderabad and Mumbai – which can be evidenced in fDi Markets data.
“India has a huge unbanked population, but also has one of the highest mobile penetration rates of anywhere in the world,” Mr Guha said.
“Some operations target more affluent consumers offering more premium products, on the basis of higher credit scores. Other entities – particularly the digital wallet companies – are trying to achieve last-mile connectivity.
The Reserve Bank of India is starting to take more interest in the fintech landscape in India
“There will be some winners and some losers. India still is largely a bank-driven market and many incumbent banks have been investing in the fintech space.”
Regulation looms
As the fintech scene in India has flourished, however, a number of digital lending apps have attracted the attention of the Reserve Bank of India (RBI) because of the aggressive recovery tactics they have used as well as the additional costs they have passed into consumers.
“The RBI is starting to take more interest in the fintech landscape in India,” Mr Guha said.
“It recently set up a working group to look at digital lending through online platforms, with a mandate to look at innovation while ensuring consumer data security and confidentiality. In addition, the regulator also launched a payment infrastructure development fund alongside a digital payment index to capture the extent of digitisation of payment,” he said
“The initiatives signal rising regulatory interest in the digital-fintech space and an endeavour to ensure that systemic risks are managed without scuttling innovation. It’s a step in the right direction because greater regulatory involvement is likely to bring in propriety. This is good for the sector, which is still in its nascency.”
Most of the fintech FDI projects originated from North America: 13 in 2019 and seven in 2020, compared to five from Asia-Pacific in 2019 and two in 2020.
“Before the Sino-Indian border skirmishes last year, a lot of investment came from China, but the rise in antagonism between the two countries has opened up channels for other investors,” Mr Guha said.
In terms of general financial services FDI into India, the number of projects originating from the Asia-Pacific region reached 15 in 2019, but tumbled to two projects last year.
