The year 2025 may not be as bustling as the previous year, a scenario that seems to be priced into estimates. This is particularly true for the IPO market. But the larger question is whether interest is waning in the financial services space. Consider this: according to news reports, two mid-sized SME lenders have postponed their listing plans, with reports attributing this to thin investor interest.
Take, for instance, SK Finance and Veritas Finance, both seen as niche, coveted lenders in their respective segments. Warburg-promoted Avanse Financial Services, which was supposed to have launched its IPO last year, has yet to refile for listing. Hopes were high for HDFC Bank-promoted HDB Financial Services, but even that had just a mediocre response at its listing. Tata Capital’s IPO is on the horizon, and debates surrounding its pricing and valuations are intensifying among investors. These trends symbolise two things: the era of finding investors at any price seems to be behind the sector, in line with the broader market trend prevailing in equities. This could also be because the days of supernormal returns are gradually becoming history.
Lending businesses, whether banks or NBFCs, are at a juncture where they must reinvent their operations. The initial decade, which in hindsight may be considered the boom period for financial services, relied on underwriting based on basic credit bureau data and some reliance on GST inputs, which kept credit costs in check. However, this is very much a thing of the past. Whether extensively mining alternative data, such as financial and digital footprints, is the way forward remains unclear.
The recent experience with unsecured loans has taught, and continues to teach, lenders and investors that the quality of the credit function must evolve. Digitising the process alone is barely a fix; it requires deeper attention. Cost structures across businesses also need a complete overhaul. If this is the case, very few businesses may manage to retain their positions in the 2-4 percent return on assets category, across both banks and NBFCs. The fact that some IPOs haven’t received the anticipated reception is a good indication that investors are taking a step back to assess the outcome of this ongoing reset in the industry. In that sense, the financial services sector may be at the beginning of the end of its exuberance. Companies will have to work harder for every penny of investment that flows into them. But will this reset last just three quarters or longer?
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