Super-money: Why everyone wants to be everything in Finance
Apr 4, 2024
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Finance experts Deepak Shenoy and Shray Chandra discuss why finance companies try to do everything in the industry, the success of Bajaj Finance, challenges faced by banks in lending, the Indian Bankruptcy code, and solutions to fix financial issues. They explore the dynamics of lending, financial regulations in India, debt recovery practices, corporate lending trends, and regulatory challenges in finance.
Financial companies diversifying into various services indicate a desire for comprehensive financial offerings.
Lending proves lucrative with higher margins and consistent demand appealing to financial institutions.
Efficient recovery of borrowed funds is a critical challenge in the lending sector, especially with smaller loans.
Balance between lending growth and risk mitigation is crucial, emphasizing responsible practices and borrower education.
Deep dives
Demand and Margins Drive Lending in Financial Industries
Lending remains an attractive option in finance due to eternal demand and higher margins than asset management. The eternal demand for credit spans all economic strata, making it a consistently sought-after product. Margins in lending are significantly higher, offering potential returns far surpassing those in asset management. This leads to a natural inclination towards lending as a lucrative financial avenue.
Overcompensation in Regulatory Compliance for Long-term Benefits
Startups often overcompensate in regulatory efforts as a strategy for long-term sustainability and growth. While compliance can seem burdensome, a thorough and diligent approach to regulatory requirements can build trust and credibility in the industry, paving the way for future success. Overcompensation in compliance ensures adherence to regulations and fosters a culture of accountability and trust.
Challenges in Recovering Borrowed Funds and the Importance of Effective Recovery Strategies
The primary challenge in lending lies in the effective recovery of borrowed funds. Recovering smaller loans can pose logistical and financial challenges, especially when the cost of recovering exceeds the potential recovery amount. Implementing robust recovery strategies, particularly for smaller loans, can mitigate losses and ensure a sustainable lending environment.
Balancing Lending Growth and Risk Mitigation through Borrower Education and Responsible Lending Practices
While the financial industry acknowledges the allure of lending growth, it also emphasizes risk mitigation and borrower education. Responsible lending practices entail educating borrowers on repayment obligations and financial implications. Balancing lending growth with risk mitigation ensures sustainable lending practices and fosters a financially inclusive environment.
Navigating regulatory challenges in lending necessitates a nuanced understanding of evolving financial landscapes, borrower behaviors, and risk management strategies. By proactively adapting to regulatory changes and fostering transparency, financial institutions can navigate regulatory complexities effectively. Collaboration between regulatory bodies and industry players is essential to ensure compliance and uphold ethical lending practices.
Implications of Low ROE in Lending Business
Low return on equity (ROE) in the lending business, such as around 4%, indicates inefficiency as higher returns can easily be achieved by investing in simple bank savings. Sustainable ROE in lending typically ranges from 20% to 25%, exceeding which becomes unsustainable and can result in losses. Establishing a diverse borrowing base from sources like banks, bonds, retail players, and foreign investors over a few years can improve borrowing costs and overall financial stability.
Challenges and Solutions in Financial Regulation and Innovation
Financial regulation plays a critical role in maintaining stability and trust in the banking sector, but over-regulation can stifle innovation and business growth. Addressing the need for more flexibility and understanding in regulations can foster a more conducive environment for financial startups and diverse players. Encouraging regulatory bodies to focus on the spirit rather than just the letter of the law can lead to more responsive frameworks that balance risk control with growth opportunities. Working towards specialized regulatory bodies that oversee specific aspects like forex, banking, and insurance can enhance efficiency and promote a more inclusive and dynamic financial ecosystem.
The idea that finance companies want to do everything from payments to lending to broking to investments is strange - why not just be good at one thing?
It’s a simple explanation, it turns out. Find out more about the business of money in a language you can easily understand, through the words of Deepak Shenoy and Shray Chandra.
Capitalmind manages Rs. 1700+ cr. as a SEBI-registered PMS, and has quantitative investing strategies that use extensively tested factor data to invest into stocks. Our flagship Adaptive Momentum strategy has outperformed the market indices over 5+ years.
