Here Comes Reliance: How Jio's Entry Could Shake Up Financial Services Sector

In a bid to cash in on India's soaring digital lending industry, Reliance Industries Ltd. will hive off its financial services business into a separate vertical. The oil-to-telecom conglomerate will host its financial services businesses under Jio Financial Services Ltd., which will then be listed on the bourses, it said.

A BQ Prime estimate suggests that Jio Financial Services could be valued as high as Rs 50,591 crore, even with a conservative holding company discount of 50%.

But what does the entry of a widely popular, well-capitalised and execution-focused participant mean for India's financial services space? Experts are divided on the potential outcome.

The first possibility is that Jio Financial Services becomes one among the many financial services ventures by conglomerates, which struggle to truly shine. The other is that it will lead to quick consolidation in the space, with weaker companies struggling to sustainably price their services.

This is not the first time that Reliance Industries has announced a financial services foray.

In 2011, the Mukesh Ambani-led company had announced a joint venture with New York-based DE Shaw Group to start a financial services platform. The platform was to first create a private equity fund, enter investment banking and finally explore retail financing. In 2014, the venture ceased its operations and then finally in 2018, it surrendered its membership to the National Stock Exchange Ltd. and BSE Ltd.

In August 2015, the Reserve Bank of India issued an in-principle approval to Reliance Industries to start a payments bank, while it was incorporated in 2016. The country's largest lender State Bank of India held 30% stake in the payments bank. This partnership, like many other payments banks in the country, is yet to truly take off.

As of March 2021, Jio Payments Bank had deposits worth Rs 2 crore and a net worth of Rs 210 crore, according to last available data.

According to Reliance Industries' annual report, the payments bank reported a net loss of Rs 23.8 crore for the financial year ended March 31, 2022.

While addressing reporters in May 2022, SBI Chairman Dinesh Khara had said that the lender had further invested capital into Jio Payments Bank to maintain its stake. Considering Reliance Industries' investments into the business, it was unlikely that the plan to develop the payments bank had been dropped, he had said.

A former asset manager, speaking on the condition of anonymity, said that except Bajaj Group, most such businesses launched by conglomerates have seen limited success in financial services, so one cannot be sure what Reliance Industries will achieve.

• Tata Capital Financial Services Ltd. reported total income of Rs 6,287 crore and a net profit of Rs 817 crore in the year ended March 31, 2022.

• The comparative numbers for Aditya Birla Capital Ltd. stood at Rs 23,633 crore and Rs 1,706 crore, respectively.

• For Mahindra Financial Services, the numbers stood at Rs 11,400 crore and Rs 1,137 crore.

• And for L&T Financial Services, it stood at Rs 12,323 crore and Rs 1,070 crore.

In comparison, Bajaj Finserv Ltd., which houses all financial services businesses for the group, reported consolidated total income worth Rs 68,439 crore and a net profit of Rs 7,028 crore for the last financial year.

One space which may see serious disruption is Indian fintech. An estimate by EY in August suggested that the domestic fintech industry is likely to have assets under management of $1 trillion by 2030, compared with $104.5 billion in 2021. Ambani is eyeing this opportunity.

The scheme of arrangement involves issuing one share of Jio Financial Services for every one held in Reliance Industries. The structure of the new company will also be flexible enough to partner with strategic and financial investors.

As part of its business, Jio Financial Services will acquire liquid assets to provide adequate regulatory capital to lend to consumers and merchants. It will also incubate other financial services businesses like insurance, payments, digital broking and asset management.

According to the plans detailed by Jio Financial Services, the various segments will be developed over three years, leveraging the 2 crore customers Reliance Industries has across various mobile applications.

This customer base provides an immediate cross-selling opportunity for Jio Financial Services. It may start with 'buy now, pay later' for its retail business to test the market, a fintech industry specialist said on the condition of anonymity.

To grow the business, Jio Financial Services would likely immediately seek financial investments, the specialist said. This could also result in the company acquiring fintech firms which have sizeable operations, but were impacted by regulatory changes in the last few months, the person quoted above said.

The Reserve Bank of India on Sept. 2 announced its guidelines for digital lending, which could potentially slow down the expansion for Indian fintech firms. The funding winter could also make some fintech firms eager to sell down to a well-capitalised competitor, the fintech specialist said.

For other weak firms, who decide to stick it out, the competition from Jio Financial Services could prove detrimental, a fintech founder said, also speaking on the condition of anonymity.

Owing to Reliance Industries' strong balance sheet and its AAA rating, cost of funds will likely be low. Just like it did in telecom, Jio could look at reducing pricing for services across lending, insurance and asset management. For companies which are already working on razor-thin margins, the founder quoted above said that this might become a significant challenge to surmount.