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The two reforms leading India’s financial revolution

The two reforms leading India’s financial revolution

The introduction of the Goods and Services Tax (GST) has made it easier for smaller business to obtain credit, boosting growth in India’s small-cap space.

Citywire AA-rated Kunal Desai said smaller companies are now issuing digital invoices under new GST rules, which allowed banks to instantly assess credit risks instead of spending months examining the business.

Desai, who runs the Neptune India fund, made the comments at a roundtable event updating investors on India's growth prospects.

‘GST is bringing online all the companies that exist in India which have operated in an offline way. They didn't pay tax, but now every single invoice is done online and is settled in a GST network. This can be game changing, as banks typically lend to the corporate sector,’ Desai said.

‘One of the most interesting areas for banks now is tiny little companies, such as rice sellers who have no way to access credit because they don't have a banking presence. When they sell stock that invoice mechanism is put online.

'If you are a bank, you now have a huge amount of data about the cash flow of that individual business and its working norms so you can price that risk to extend credit to them.’

Financials is Desai’s largest sector allocation in the fund at 28.4%, while he holds several banks in the top ten holdings including Yes Bank (3.9%), IndusInd Bank (3.2%) and ICICI Bank (3.1%).

Digital economy

Desai said the introduction of biometric ID cards was transforming the industry as all Indians now have bank accounts.

He esai added that ID cards allowed Indians to access government subsidies at the point of sale, which had led to less leakage in the system and encouraged individuals to use their bank accounts.

‘The financial sector is seeing this revolution, which is hugely interesting. One of the things which India is trying to do through demonetization is trying to create a digital economy and quickly bring in the 500 million poor people in India into the banking sector,’ Desai said.

‘At the same time every single India will have a biometric ID, which is an ID card with an ID  number linked to your thumb print and your iris scan.

'The eco-system by which a consumer will buy a bag of onions or chillies at the grocery store will be done essentially by his thumb print and linking his id system into the banking system.’

 Over three years to the end of September 2017, the Neptune India fund returned 40.44% in Indian rupee terms. This compares to a rise of 27.47% by its Citywire-assigned benchmark over the same time frame. 

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