A recent IPO here in India sparked off widespread debate about the investor frenzy for equity markets. If you are someone who is invested in the markets, there is little chance you missed the buzz around Resourceful Automobiles. The company, specializing in sales and services of motorcycles/scooters and about 8 employees, was in the market for funds. Despite seeking just $1.4 Mn, the IPO ended up receiving bids worth $580 Mn. Yes, oversubscribed by 419 times!!!
And, this excitement isn’t an isolated incident. Take the case of the Arkade Developers $49 Mn IPO, which was subscribed over 106 times, or Bajaj Housing Finance's $790 Mn IPO, which saw bids worth $36 Bn. Investment bankers predict this IPO euphoria will continue, with India Inc expected to raise over $12 Bn in FY25.
So, does this signal a broader shift in consumer investment behavior? What does this mean for financial institutions? We decode this and more in the #FutureFinance edition today.
Shifting Sentiment: From FDs to Equity Markets
These developments seem to signify a larger consumer trend - Are more Indians moving away from traditional investments like fixed deposits and real estate, favoring the stock market instead?
Well the data seems to indicate so. According to a report by BofA Securities, household savings in bank deposits fell from 39% in FY2001 to 37% in FY2023, while savings directed toward capital markets doubled from 4% to 8% during the same period.
And, there is more! The dip in CASA (Current Account Savings Account) deposits also reflects this shift, as more funds flow into the stock market.
India is now the world’s fifth-largest equity market and this is only expected to grow. Analysts at Jefferies forecast that the country’s market capitalization will reach $10 trillion by 2030.
Despite occasional cautionary notes from regulators, this growing confidence in the stock market points to a deeper trend toward equity investments.
The Rise of Retail Investors
The surge seems to be driven by an increasing number of retail investors lapping up the markets.
Today, there are over 9.5 crore active Demat accounts, and retail investors directly hold nearly 10% of the market across 2,500 listed companies.
In FY24 alone, 3.7 crore new Demat accounts were opened, reflecting the surge in individual market participation.
The Indian government has taken notice of this shift, with the Economic Survey 2024 advising caution, as investor expectations of future returns might be overly optimistic. While this growing retail participation is promising, it presents both new challenges and opportunities for both investors and financial institutions.
Implications for Financial Institutions: The Rise of Fintechs
The investor shift has significant implications for traditional financial institutions that have long relied on safe-haven products like fixed deposits.
As liquidity moves out of banks and into capital markets, fintechs have been trying to step in to fill the gap. As the number of consumers increase, these digital disruptors offer innovative platforms for both retail and institutional investors, providing streamlined onboarding, wealth management solutions, and access to global markets.
For traditional banks, it’s no longer enough to rely on legacy systems. Compliance, once a back-office function, has become a key focal point for both large and small institutions as regulations grow more stringent.
It is increasingly becoming evident that banks need to rethink their product and technology strategies to keep up with evolving customer expectations.
Do Banks Need to Upgrade Their Tech?
The consumer shift toward equities offers a significant opportunity for banks, but only if they adapt.
Over the years, banks have been upping their focus on partnerships with fintechs to improve their offerings. However, that may not be enough anymore as their core technologies are back in focus.
Legacy banking technologies, especially Loan Management Systems (LMS), have not seen significant upgrades in decades. As banking systems became more complex over the years, additional features were bolted on, making these systems cumbersome, expensive, and prone to operational risks.
It is here that banks are starting to now struggle. They are now increasingly focussing on their technology to meet the changing needs of both customers and regulators.
Products like Loan Against Securities (LAS), which allow individuals to borrow against their mutual fund or stock holdings, are becoming increasingly relevant as retail investors grow.
Financial institutions will need these capabilities to stay competitive.
Additionally, customers are increasingly demanding a seamless experience across multiple touchpoints, from investments to loans, making technological upgrades crucial.
Conclusion: Preparing for the Future of Financial Services
One thing is becoming increasingly clear that the shift from fixed deposits to IPOs isn’t just a passing trend—it reflects a larger transformation in the financial services landscape.
Financial institutions will have to embrace technology, enhance regulatory compliance, and align their offerings with the needs of today’s investors. Those who adapt will thrive in this rapidly evolving environment, while those who fail to innovate risk being left behind as equity markets reshape the future of financial services.
Interesting times ahead, isn’t it?
What other opportunities does this consumer shift create for financial institutions?
