Banks' allure is thin for rich Indians

The problem, at least for the swelling ranks of wealth managers in India, is that Piramal does not need them. He is instead putting his millions into his own companies and real estate ventures.

“These are only two areas I invest in, and therefore, we don’t need any advisor,” said Piramal, who added that he was approached by private bankers all the time.

In 2010, the number of people with more than $1 million in investable assets rose nearly 21 per cent in India, to 1,53,000, according to a report by Capgemini and Merrill Lynch.

India may be minting millionaires, but that is failing to produce profits for the banks that have set up teams of well-dressed, well-paid bankers to help manage those riches.

A narrow product range, rising competition, falling advisory fees and billions of dollars in wealth hidden from tax officials have stifled profits for private banks, which have aggressively increased operations in India.

At the same time, expenses, mostly salaries, are growing as much as 20 per cent a year, some people in the industry estimate, meaning many private banks must absorb potentially heavy running costs for years before they are profitable.

“No one is making money in private banking in India,” said the head of India wealth management at a US bank, who asked to remain anonymous because he is not authorised to speak to the news media about client-specific issues. “Margins are so very low here because very few people want to pay money tor advice, and your cost of operations is going up.”

The reason for profit margin pressure on the sector that serves the wealthy is partly that only “plain vanilla” products are available for clients, said Bank of America Merrill Lynch head (global wealth and investment management for India) Atul Singh.

A dearth of fee-generating alternative investment vehicles, like hedge funds and private equity, a $200,000 cap on overseas investments by Indians, and an underdeveloped corporate bond market mean most investments are channeled into run-of-the-mill equity products, bank deposits and government bonds. Investments in exotic assets like art and wine are rare in India. Instead, the homegrown rich keep their money in real estate and gold, which does not require the services of polished bankers of the sort that cater to the rich in places like London, New York, Singapore and Zurich.

“When product platforms are largely undifferentiated, then prices get driven down,” Singh said, adding, “Making money is certainly tough for players in the sector, especially ones without scale.”

As a result, many tycoons like one of India’s wealthiest men and Wipro Chirman Azim Premji, with a net worth estimated by Forbes at $16.8 billion, prefer to use in-house staff members to manage personal wealth. The gradual shift from charging transaction-based fees to an advisory fee model, amid a global move to discourage sales of risky exotic instruments, has added to the pressure on margins.

Private banks in India charge wealthy clients advisory fees between zero and 0.5 per cent, which barely covers costs for smaller players. This compares with about 0.5 per cent to 2 per cent in more developed markets, industry insiders say.

Pressure on fees and rising costs have dragged down most wealth management firms' profit margins to a range of 0.4 per cent to 0.5 per cent from a range of 1 per cent to 2 per cent a few years ago, they said. The tough conditions are exacting a toll, even as many banks like Morgan Stanley, Royal Bank of Scotland, Barclays and Bank of America Merrill Lynch continue to add staff with an eye on the long-term potential of the fast-growing economy.

In neighbouring China, wealth managers also contend with tight regulations and limited product offerings, but they also face less domestic competition. Many rich mainland Chinese invest in real estate or stash their wealth in Hong Kong or Singapore, which are thriving private banking centers.

Many of the richest Indians also have substantial wealth overseas and do their private banking in Singapore, Zurich, London or Dubai, where there are more investment options and where some banks cater specifically to non-resident Indians. A large chunk of Indian wealth goes undeclared. The tax authorities say billions of dollars have been deposited by Indians in Swiss bank accounts and other tax havens.

A government panel in 2009 found illicit Indian funds ranged from $500 billion to $1.4 trillion, which is now nearly the size of the Indian economy. Global Financial Integrity, which is based in Washington, estimated illicit outflows of about $16 billion a year from 2002 to 2006.

The challenge of getting the rich to turn to private banking is made greater by poor market performance, with Indian shares sliding about 17 per cent this year. A spate of scandals embroiling the country’s business and political elite has also soured sentiment among the rich.

To woo clients, some banks will send the adult children of entrepreneurs for short training courses at US universities on preserving and increasing family wealth. Closer to home, private banks coddle prospective customers with wine tastings and live music and dance performances by Bollywood stars.

Technology consulting firm Cognizant said in a report that the Indian wealth management sector would remain fragmented in the short term, with a large number of brokers, financial advisers, insurance agents and tax consultants offering services.

Bank of America Merrill Lynch, Kotak Mahindra and HSBC were cited by Cognizant as strong players in the sector in India because of their reach, potential for cross-selling banking products and focus on domestic equities. Changes in the sector are inevitable, industry officials say.

“Some level of consolidation will have to happen in the next year or so,” said Tashwinder Singh, head of Citi-group's private bank in India. “Pure broking businesses will find it difficult to continue because costs are rising and margins are under pressure.”