Financial sector in India is a compounding story for the next two decades: Niren Shah

Fintech and financial services remains an enigma in the minds of global LPs. Here’s a closer look at the evergreen market and its growth for the two decades. 

When in India, one must build companies with an eye for the public markets to exit, according to Niren Shah, Managing Director and Head, Norwest India. The veteran investor believes so because the mergers and acquisitions (M&A) market has not taken off for tech businesses in India, beyond the height of Walmart-Flipkart acquisition in India. 

“This is a big realization for most LPs that India is a little different, where if you don't have GPs building companies for IPO, which means profitability, structure, then it won't make sense because they won't eventually be able to get an exit. One can only do so much secondary rounds and must eventually go for an IPO,” he told an audience of global LPs and investors at the Annual General Meeting of Avataar Ventures, held last quarter in Bangalore.  

An arm and a leg to go public

The capital markets are on a steady rise. There’s $2B flowing in from domestic investors every month which is not likely to abate for a long time. The market cap ($5 trillion as of June 2024) is expected to reach $10 trillion by 2035. There’s a dramatic rise in demat accounts, SIP inflows as well as number of listings are driving the market forward. 

Building IPO-able companies is not easy. One must be ready for a rigid and compliant regulator, maintain the high governance standard, onboard independent board members, along with eight quarters of predictable revenue and profits.

“A lot of VC companies are not used to all these independents asking questions. It takes a lot of rigor to go public. You have to give an arm and a leg to go public because people want a discount,” said Niren, who has taken six companies public and is helming 15 more on the way. The preparation must start three to four years in advance. 

Decoding the fintech significance 

Norwest India, which manages an AUM of $15.5B, has about 30 percent of its investment in the fintech sector. It is, after all, the sector with the highest GDP contribution and captures 32 percent of the NIFTY. 

However, fintech and financial services remains an enigma in the minds of global LPs; They do not fully understand why it is so meaningful. Niren highlighted key areas of opportunity.

The credit business

There is a long way to go for credit business in India, standing at just 70 percent versus countries like the UK and US that have achieved 170 percent. Niren believes there's an appetite to grow in absolute terms for the next 15 years. 

MSME Finance

Dubbed the lifeline of the Indian economy, Micro, Small & Medium Enterprises (MSMEs) contribute about 27 percent to the country’s GDP. Almost half of the Indian population are engaged in running different kinds of ‘business.’ However, there’s a gap of $530B in financing such small and medium businesses. This shows great promise for NBFCs and micro-lenders at least for the next two decades. More importantly, Niren underscores that MSME financing business is not a winner-take-all market. 

Vehicle financing 

The used trucks market is becoming more organized, growing steadily at 13 to 15 percent. With improved infrastructure, the number of surface transport and freight indexes is increasing. There are new opportunities in terms of EV financing as well. 

Vehicle financing is as challenging a business as it is vast. “When you finance a truck and the person doesn't want to pay, they just drive to the other end of the country and hide there. You really need to have the ability to trace and collect across states and the country,” Niren explained, adding that one must understand the ins and the outs of the trade well. The financing market is just as promising in housing and supply chain but the financing needs are not adequately served. 

While the financial market in India ($2 trillion) has made good progress so far, an increasing gap has persisted when compared to other markets like the US ($36 trillion) and China ($33 trillion). This shows the roadmap of opportunity and Niren believes India’s financial sector is a compounding story for the next 20 years.

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