$3 billion manager bets on India's beleaguered financial sector.

By Ishika Mookerjee and Abhishek Vishnoi

IIFL Asset Management, which oversees $3.3 billion in assets, is set to expand on a strategy of investing in the most stressed area of India’s economy: the financial services industry.

The firm aims to eventually attract $1 billion from funds globally to invest in the nation’s privately owned banks, shadow lenders, insurance companies, asset management firms, stock exchanges and credit card providers after expanding an existing $400 million fund in the first half of 2020, said Anup Maheshwari, chief investment officer.

India’s financial services industry is grappling with a 17-month credit crisis, in what has come to be dubbed as India’s “mini-Lehman moment,” in reference to the vulnerabilities that led to the demise of the US bank. Defaults that began in 2017 with the IL&FS Group --Infrastructure Leasing & Financial Services Ltd. and its associates -- have triggered liquidity issues across other banks and shadow lenders that now face increased regulatory scrutiny.

Maheshwari, however, asserts that India’s financial services sector is intact and supported by the prospect of robust growth in consumer financing even as the South Asian nation’s economy falters. Consumer spending underpins “the big picture on financial services and why it’s so crucial to the performance of the economy,” he said.

Almost half of the consumer durables sold in India are financed, Mumbai-based Maheshwari said. Still, India’s retail-credit ratio to gross-domestic-product ratio of about 15 per cent is among the lowest in the world, he said. As incomes rise and consumption increases, retail credit could triple in the next decade as households with a per capita range of $1,200-$3,500 increase consumers by as many as 100 million in the next decade.

Still, not all investors are convinced the time is ripe to invest in troubled financial services companies as the nation grapples with a slowing economy and rising unemployment. Following the crisis, local funding conditions have worsened to the extent that non-banking financial companies will have to turn to offshore financing in 2020, Fitch Ratings Inc. said in a note on Tuesday.

Maheshwari is unfazed. The firm’s investment focus will be financiers of individual customers, rather than corporate-related lenders that triggered defaults.

“Financial services are going to be at the heart of the Indian economy and the Indian stock market performance,” he said.