Executive Summary: Indian Financial Distribution at the cusp: Vision 2020
The financial distribution industry in India is expected to see tremendous growth in the coming decade as a galloping economy boosts employment and raises incomes, and the much-vaunted demographic dividend drives investments into the capital markets. India is expected to log high GDP growth, which will push up household incomes and savings significantly. This will catalyze household investments of a ‘young’ nation where the number of households having annual income in excess of Rs 5 lakh is estimated to rise from around 6.24 crore in 2014 to around 12.14 crore by 2020.
We believe the next six years can very well spell boom time for financial products, specifically mutual funds and insurance plans, given that the economy is shifting to a higher-growth path. And as average household income rises, money managers and financial planners will have their task cut out: to steer the teeming millions towards financial investments and better potential returns for their hard-earned monies.
India’s financial distribution industry has a large footprint, accounting for around Rs. 7.92 lakh crore ($126.63 billion) of assets under management of mutual funds (MFs) as on March 2015 and Rs. 3.57 lakh crore ($57.08 billion) of insurance premium collected in 2013-14. Yet, less than 5% of India’s household financial savings of Rs. 8.19 lakh crore ($130.95 billion) was invested in the capital markets in 2013-14. There are three primary reasons for the abysmal level of interest: lack of awareness about financial products, market volatility, and a conservative mindset arising from low per-capita income. We believe it is in the nation’s interest that we have long-term policies for channelling household savings into the capital markets.
Indeed, financial intermediaries and distributors will have a seminal role to play in fully realising that enormous potential. Today, the average working person, because of inadequate awareness and limited knowledge of investments, requires guidance and handholding. While the proliferation of internet helps many find answers to their investment questions, a good lot require the personal touch -- of a friend, philosopher and guide, as it were -- to wade through the complex world of investments and arrive at the optimal choice.
Developing a vast pool of financial advisors and distributors is thus an imperative. This also helps in employment creation and retail penetration, and thereby benefits the economy at large. And since the industry requires specific skill sets, it is equally important to put in place initiatives that will foster such human resource development. Existing distributors are expected to resort to digital distribution to grow the industry significantly and at the same time reduce costs.
Implementation of the Securities Exchange Board of India's move to bring in a self-regulatory organisation (SRO) for mutual fund distributors would aid the industry. Additionally, creation of a single SRO for the entire distribution industry will help monitor and regulate financial intermediaries. This body could establish best practices and guidelines for its members, while keeping the interests of investors in mind, helping drive financial penetration further and spreading investor awareness. However, recent changes in the mutual fund industry including the recently imposed service tax on MF distributor commissions, and distributor commission capping can be a major dampener for the MF and the distribution industry unless resolved soon.
High potential
Within the financial products universe, mutual funds have the potential to grow the fastest as investors move away from traditional products and explore market-linked ones for long-term wealth creation. The mutual fund industry has potential to grow at 23% annualised over the next six years to an asset size of Rs 37 lakh crore ($591.57 billion). This is likely to be supported by distribution channels, which are estimated to grow at around the same pace. The pace will be aided by an increase in penetration in order to meet the financial aspirations of the rising middle-class as well as capital market performance. Banks, both private and PSUs, are in a sweet spot to capture the large middle class population across geographies. Independent financial advisors (IFAs) and national distributors (NDs) through technology-enabled sub-broker models are expected to expand their reach and presence in the B-15 cities (non-metros) to capture the biggest chunk of this growth opportunity.
In the Insurance industry, rise in penetration will be fuelled by increase in population, particularly the working age population, rising income levels, as well as other socio-economic factors such improvement in lifestyle, higher medical costs and nuclear family system. We estimate that although the Life Insurance Corporation of India (LIC) will continue to be far ahead of the private sector in terms of market share, the private sector will grow faster. Traditional products would continue to reign due to pricing disparity. Premium in life insurance is projected to more than double to nearly Rs. 9 lakh crore ($143.58 billion) by 2020 from Rs. 3.14 lakh crore ($50.20 billion) in 2014, while premium in the non-life insurance industry is presaged growing two-and-a-half times from Rs. 70,610 crore ($11.35 billion) in 2014 to nearly Rs. 1.8 lakh crore ($29.26 billion) by 2020.
As alternative investment funds (AIFs) and portfolio management services (PMS) are niche products, mainly targeting the high net-worth individual (HNI) and ultra-high net-worth individual (UHNI) segments, they form a small part of the overall product pie. India being a developing economy is yet to see significant investment flow in this category. This segment is likely to rise among private sector banks, boutique wealth management firms and national distributors due to the increase in HNI base at the end of 2020. However, this figure may likely be marginal compared with other products.
Key drivers
Hands on the deck: There has been a decline in the number of active distributors in recent years for both mutual funds and insurance. Retaining distributors and retail agents becomes a huge challenge for insurers in particular, considering they invest a lot on training. High level of churn affects long-term plans and costs of companies. With fewer players, the reach across different income and geographical segments is limited and penetration that much more difficult. We believe having players catering to multiple client segments will improve the economics of business. Skill enhancement and training would be imperative to expand the network of distributors. As such, the number of distributors should potentially grow by 3 to 5 times by 2020 to meet the industry potential.
Awareness: Low financial literacy levels and lack of awareness, unless addressed well, will inhibit the industry’s growth. Financial products continue to be ‘push’ products in India and regular connect plays a huge role in fostering trust, retaining investors and attracting more investment. Asset allocation and financial planning help in goal planning and meeting various objectives. However, till such time investors remain unaware of such concepts, money will continue to flow into gold and real estate. Development of new distribution channels, government support through schemes such as the inclusion-driver Jan Dhan Yojana and greater focus on retirement planning through introduction of schemes on the lines of the 401(k) in the US will help the mutual fund industry realise its potential.
Business Viability: Rising employee costs (fixed and variable) and real estate prices also threaten the distribution industry’s growth - particularly the national and regional players. The industry is currently grappling with changes in its business model, such as capping of commission and inclusion of distributors under the service tax regime, which could be a major dampener for the industry. This can affect players who haven’t adopted a scalable model. While automation cuts costs, complex systems can add to costs when business plans are revised.
Technology: As investors become more tech savvy, the pace of integration of newer technologies will also become easier. Recent initiatives to extend financial inclusion through mobile banking and trading and initiatives to enable tablet-based investments are precursors to the great role technology will play in years to come. Appropriate technology can also help reduce transaction costs. A reduction in physical costs (paperwork, labour) enables the distributor to focus on value additions for the client, bring in efficiency of time and enable the distributor to increase volume. In addition, technology can play a major part in compliance of rules and regulations in maintaining up-to-date database in keeping with norms. Thus new-age technology models, with ease of transaction and better reporting, can lead to better results for industry growth by distributors.
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