Players adapting to Indian conditions

In a country where cricket is a religion, the Indian cricket team’s five-wicket win over Australia in the ongoing 2011 ICC Cricket World Cup’s quarter-finals was a moment of national joy and celebration. Batsman Yuvraj Singh’s unbeaten 57 runs won him the Man of the Match award for the fourth time in the tournament while, cricketing legend Sachin Tendulkar, who had scored his 99th international century in the previous match against South Africa, crossed 18,000 One Day International runs with his 53-run total.

Indian cricketers enjoy a huge and obsessive fan following that often rivals that of Bollywood stars. Cricket is also the only lucrative sport in the country. Interestingly, 38 year-old Mr Tendulkar, who is revered as a demi-god amongst cricket lovers throughout the world was recently ranked 59th in a recent survey of most trusted brands in India, ahead of many public companies. He was the first Indian cricketer to breach the million-dollar mark with a contract with sports management company, WordTel. Since then, others have followed suit and today, courtesy of brand endorsements, most Indian cricketers playing at the international level are millionaires, reflecting the aspirations of their countrymen striving to succeed in an economically resurgent India.

Sports celebrities and Bollywood stars however account for a tiny fraction of the growing high net worth individuals (HNW) and ultra HNW in the country, regarded to be one of the fasted growing domains in the financial services industry. According to the Zurich-based Credit Suisse Research Institute’s inaugural Global Wealth Report, released in October 2010, there are around 170,000 HNWs in the country. These include among others, agriculturists, old economy players from established business houses, IT and new economy entrepreneurs and highly paid professionals.

The Wealth Report states that wealth in India has grown strongly over the past decade with wealth per adult more than doubling from $2,000 in the year 2000 to $4,900 in 2010. Over the past decade, the report estimates total wealth in India has tripled to $3,500bn, and is predicted to nearly double to $6,400bn by 2015.

FIGHTING FOR THEIR SHARE

While the share of ‘organised’ players in the market is steadily growing and according to analyst firm Celent, is supposed to account for 80 percent by 2014, the wealth industry is highly fragmented. There are a variety of financial institutions vying for a share of the pie. This includes foreign banks, brokerages, local private sector banks, boutique firms, independent financial advisors (IFAs) and even state-backed public sector banks which have for long primarily focused on servicing the masses.

In recent years, wealth management service providers have managed to establish and consolidate their presence in various market segments. For instance, domestic banks are strong in the affluent segments of the market, while international private banks have become strong in the HNW and ultra HNW sectors.

“Foreign banks are very well entrenched in the market because they have the products and the knowhow,” observes Ravi Nawal, analyst at Celent.

“Brokerages, domestic Indian banks and IFAs have a strong presence among the mass affluents and in the lower end of the HNW segment. The public sector banks on the other hand have been trying to launch their wealth offerings but they haven’t yet achieved success. And even when they do launch, they will achieve initial traction in the mass market segment since that comprises their near-captive customer base.”

Royal Bank of Scotland (RBS), a typical foreign entrant, is targeting the HNW segment. RBS has been present in India since 2002 and in 2008, it even signed up Mr Tendulkar as Global Ambassador to increase its brand awareness in the Asia Pacific region.

However, last year the bank decided to sell its retail and commercial banking business in India to HSBC, while continuing to retain its wholesale and private banking operations. The latter in turn owes much of its antecedents to the private banking business of Dutch financial institution, ABN Amro which RBS acquired a few years back.

“India is a priority market for RBS wealth management,” says Shiv Gupta, head of private banking for India at RBS.

His wealth management business currently runs assets worth $1bn and the bank’s target is to triple this over the next four to five years. But one of the biggest challenges facing the Indian wealth industry, observes Mr Gupta, is lack of breadth and depth of instruments available to invest in.

For instance, he says the domestic fixed income market is very shallow. Additionally, alternative investments such as hedge funds are non-existent. “The non-availability of a liquid deep market in a variety of financial instruments limits our investment options and reduces our flexibility as well,” explains Mr Gupta.

Like in other newly developing markets in Asia, talent is a critical issue for the Indian wealth industry, he says. “The market is growing in terms of scope and there is an urgent need for experienced relationship managers who can provide quality advice and build lasting relationships with our customers. But unfortunately, the market is still very young and there is a dearth of such talent,” says Mr Gupta.

“Essentially, wealth management is a services-driven business. Products are replicable but service isn’t. The challenge will be how to instill a services driven mindset,” notes Mr Nawal of Celent.

Mr Gupta at RBS points out that regulation, or the absence of it, also presents a major drawback. “There is a lack of a structured overarching framework for wealth management in India at present,” he says.

Since wealth management cuts across the financial services spectrum, different wealth management products come under the purview of different regulatory bodies.

Fortunately, this issue is now being addressed. The Indian government is in talks with financial sector regulators such as the Securities and Exchange Board of India (Sebi), the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority, the Forward Markets Commission and the Pension Fund Regulatory and Development Authority (PFDRA) to make necessary amendments in their respective Acts and create specific provisions for regulating wealth management and investment advisers.

The new set of rules are being framed under the aegis of Financial Stability and Development Council (FSDC), a high-level regulatory body chaired by the Finance Minister that was set up by the government in December 2010 in place of the erstwhile High Level Coordination Committee on Financial Markets. Local media reports suggest that RBI and Sebi may be made jointly responsible for implementing the regulations pertaining to wealth management and keeping a watch for any violations.

Industry players and experts are unanimous in their approval of this development. It will have a positive impact on the industry, says Celent’s Mr Nawal. “All mature markets have a very strong regulatory oversight.The new guidelines will help the industry develop in an orderly fashion by providing guidelines for risk management, advisory services and so on,” he explains.

“These are steps in the right direction. The new regulations should lead to an upscaling of quality in the industry,” agrees Mr Gupta at RBS.

Crucially, the Indian government sat up and took note of the absence of wealth management guidelines when an alleged $70m fraud came to light in December in Citibank’s Gurgaon branch near Delhi, where a relationship manager was allegedly siphoning off the money from over 20-odd accounts of HNW customers at the bank.

ROBUST PROCESSES

While the Citi incident did send tremors through the wealth management industry, most banks have since been taking steps to improve their controls and make their risk management processes more robust.

Rattan Chugh, Managing Director of boutique wealth adviser, Cornerstone Wealth Management says there are two issues affecting wealth management distribution in India: fraud and misselling and of the two, the latter is a much greater problem. “Fraud doesn’t happen very often. What happened at Citi was a case of failure of internal systems and controls. However, misselling is quite rampant in India where products are often pushed merely because the agents get their commission.”

For instance, he gives the example of mutual funds where entry loads were removed last year, which dramatically reduced margins from 2.25 percent to 0.25 percent. As a consequence, he says, most distributors migrated to high commission insurance products, while mutual fund sales have been languishing.

“In mature markets, where customers understand mutual funds, they are willing to pay for advice, but, in non-mature countries like India, an advisory fee adversely impacts the product’s attractiveness,” states Mr Chugh.

New rules and regulations will bring about a greater level of transparency in the wealth management space as well as drive growth of advisory services, adds Mr Chugh. “In mature markets, there are stringent guidelines for wealth management services and a very clear demarcation between advice and distribution. Over time, India too will progress in that direction.”

Shiv Gupta, Royal Bank of Scotland: "The market is growing and there is an urgent need for experienced relationship managers who can provide quality advice"