Reliance Jio takes a bold call on financial services amid tough competition

In 2011, Reliance Industries Ltd (RIL) had signed a joint venture with US giant D E Shaw to build a financial services business in India. After that move failed, the petrochem-to-telecom behemoth tried its hand at other forays into finance, such as setting up a payments bank with State Bank of India, which met with limited success.

Undeterred by these early stumbles, RIL last week announced the demerger of its small financial services business into Reliance Strategic Investments Ltd (RSIL), which will be renamed Jio Financial Services (JFS). RSIL is a wholly-owned subsidiary of RIL and a registered non-banking finance company. The intention is to build a large digital and fintech platform leveraging its huge customer base in telecom and retail. The company will be listed soon.

By separating financial services from its core business through the listing, RIL wants to keep it at arm’s length, which would be a necessary regulatory requirement for the financial services businesses, said a source aware of the development.

Details are sketchy but the company said it would be concentrating on the following areas for at least the next three years: Lending to consumers and merchants; incubating other financial services businesses such as insurance; payments; digital broking and asset management.

JFS is also open to inorganic growth in insurance, asset management and digital broking, apart from getting into joint ventures. As it pointed out, it already has 20 million customers availing of some digital financial services. Yet it is still a tiny business; JFS’s turnover is 0.3 per cent of RIL’s.

So, what has made RIL take the plunge in financial services again? A source close to the company pointed out that RIL has a footprint of over 600 million customers via its mobile and retail business (it has over 400 mobile customers and 200 registered offline consumers on Reliance Retail apart from others online). Providing credit for their needs is a natural corollary to building an end-to-end consumer ecosystem.

Rough estimates suggest that half of RIL’s mobile and retail consumers access credit, but they do so from competitors. “Currently, Reliance is the originator of the credit business from its consumers, but it is fulfilled by other financial services companies. They pay Reliance a nominal fee, which is passed on most of the time to the consumers at a lower price. We understand the business and have expertise but we don’t do it on our own,” said a senior RIL executive.

RIL can also leverage the sprawling spread of its physical touch points and build an omni-channel distribution system. It has over 16,000 stores and in the last quarter completed over 250 million transactions.

The granular data of these customers can be processed not only to target financial services products but cross-sell them across categories and analyse consumers’ credit worthiness, a key element to avoid the build-up of bad loans.

The two million merchants on the Reliance Retail platform also offer an opportunity in terms of offering them credit. The target is to hit 10 million merchants in five years as it expands across towns and rural locations.

But consumer finance is not an easy business to crack. It is heavily regulated and the competition is tough. JFS will have to contend with Bajaj Finance, the dominant player that has maintained its leadership despite the entry of big banks.

BoFA Securities predicts that JFS would focus on the “high-ticket, low-frequency” category competing with Bajaj Finance and other companies such as Paytm and ZestMoney. And in retail digital broking, the top four players, Zerodha, Upstox, Groww and Angel One, have acquired half the active National Stock Exchange client base in FY22, mostly playing the discount game.

Analysts are divided on how quickly JFS can convert its captive customer base to consumers of its financial products. A senior executive of a telecom company that is also into financial services said: “There is nothing to believe that consumers who are my mobile customers will also buy financial products from me. That happens in China where the choice has been restricted. In India you have dozens, if not more, players in each segment of financial services who are available online.”

Sources privy to JFS plans said it might begin its foray in the insurance and mutual fund business initially as a reseller to other companies and build volumes to a level where it can go on its own. “The advantage is that they will have the freedom to choose with whom to partner and also help in building new products on top of it,” said the source.

Here too, it has Bajaj Finance as a competitor. Bajaj has 63 million customers and expects to go up to 69 million by end of FY23. It is currently cross-selling its products to more than half of its customers and has a physical presence in over 4,400 distribution points across the country plus geographical reach in 1.43 million locations.

It also appears to be well prepared for the RIL onslaught, building its own digital overlay, which will go live across all products by March 2023. It already has gone live for personal loans, EMI cards, co-branded credit cards, and the two-wheeler marketplace among others. It has 26 million users on its app and hopes to hit 38 million by FY23.

But sources close to RIL say the market is big enough and growing. And while one might compete, there will be areas where one would be partnering with them, too.

They are right. ICICI Securities said the total assets under management (AUM) of the mutual fund industry are at Rs 37.6 trillion as of FY22, growing at 20 per cent with 130 million customer portfolios. The AUM-to-GDP ratio, it says, in India is a mere 16 per cent compared to global averages of 74 per cent. With growing awareness of investing, there is a huge market and exponential growth possible. The scale of players is still very small, with the largest (HDFC Mutual Fund) recording revenues of only Rs 24 billion. Clearly, it’s a market that offers scalability for any new player.

This is also true for the insurance business. Estimates say the insurance industry will grow at around 15 per cent a year in the next three years, and the largest player, LIC, still has a 65 per cent market share in life insurance.

Similarly, the retail brokerage business has seen huge competition from start-ups. But it has grown by 30 per cent in FY22, according to ICRA, and monthly demat account additions have gone up three times between FY21 and FY20. So the market has just started exploding.

Many experts believe that Reliance could disrupt the financial services just as it did in telecom by offering products at discounted rates; others say they will not compromise on margins. BoFA Securities expects JFS to have cheaper access to capital, considering that the parent company will still hold 50 per cent of it even post-listing due to RIL’s strong credit rating. Clearly, it’s just the beginning but the question is whether it will get it right this time.

The Market Opportunity

• Consumer durable loans jumped by 66% in value and 43% in volumes in FY22 dominated by non-banking lenders
• Home loans grew 29% in value and 20% in volumes in FY22
• The AUM-to-GDP ratio in India is a mere 16% compared to global averages of 74%
• Insurance industry will grow at around 15% annually in the next 3 years
• Retail brokerage has grown by 30% in FY22

Source: Credit Bureau, ICICI Securities, ICRA, industry bodies