JOIN USWhy India fails to excite wealth managers
Of late, India has been witnessing the exit of a few foreign wealth managers from the market here. In November 2015, HSBC Holding announced the closing of its private banking unit in India as part of its group strategy, thus marking the exit of another foreign bank, after Morgan Stanley and Royal Bank of Scotland, from the cut-throat wealth management business in Asia’s third-largest economy.
The bank’s spokesperson said that the bank would offer private banking clients the choice to move to HSBC Premier, the bank’s global retail banking and wealth management platform. This was despite the fact that the bank posted pre-tax profit of $7 million in its private banking business in India for the six-month period from January to June, accounting for 4.5 per cent of Asia’s private banking business and up from $5 million in the same period, a year ago. As per the World Wealth Report published by Capgemini, India had 1.98 lakh High Networth Individuals (HNIs), or 1.35 per cent of global HNIs, in 2014. The number was up 26.9 per cent (1.56 lakh), when compared with a year-ago period.
“Firstly, the reason could be a lack of awareness and understanding of many of the products that are offered under private banking. Products such as private equity, real estate funds and other structured products remain complex and opaque. Secondly, a large section of HNIs in India mostly have a business/entrepreneurial background and much of their wealth is typically ploughed back into their own business. The availability of a large segment need not automatically convert into opportunities for private banking,” says Vidya Bala, Head of Mutual Fund Research at FundsIndia. Thirdly, even now, a chunk of HNI money is known to go into physical assets as opposed to financial assets, leaving a smaller pie for this banking segment, she says. Over the years, wealth managers have short-changed their customers leading to their poor reputation. “Their lack of focus on customers and a short-term business orientation have led to this. This is the key reason why they are being driven out of business,” says Dhirendra Kumar, CEO of Value Research India. Prof Vijaykumar Nishtala of Wellingkar Institute, who has worked in a wide spectrum of banking areas, thinks that a narrow client base is one of the reasons for the wealth managers exiting Indian markets. “Though we are growing at a higher rate, one should remember that the HNI base in our country is small, and in absolute terms, we are still insignificant. Further, the large number of small unorganised players in the wealth management market eats into the pie of the larger players and makes business for them unviable” says Nishtala.
Reasons aplenty
Apart from these, there are many other reasons that result in a narrower client base, which are FATCA (Foreign Account Tax Compliance Act), a rigid tax system and opaque tax redressal mechanism, HNIs shifting base from India to other countries, prevalence of unaccounted money that does not enter banking channels in India, not enough depth in the financial markets and the absence of innovative instruments and HNIs’ preference to invest in venture capital funds and startups directly. One point to note here is that the advice and distribution are also closely linked in such products — especially in insurance and other structured products, adds Nishtala. Indian HNIs have a propensity for cash, and therefore, it forms a large part of their portfolio. Also a large number of HNIs prefer real estate as a vehicle for investment. It is also a fact that a few of the players have indulged in unscrupulous practices in the recent past. “However, this is an issue that the country as well as the wealth managers have to live with, at least for some more time,” says Nishtala, adding that the exit spree is not going to have any impact on the present scenario.
Indeed, the time has come that these wealth managers revamp their strategies in India. “They definitely need to revamp their strategies as this is a long-term market. India is on the cusp of recording the highest global economic growth rate, and this trend is likely to continue for some time. This will result in phenomenal growth of HNIs. Further, the tax regime and other corporate governance issues are getting sorted out and the market will pan out well for the wealth managers who grit their teeth, and wait for a couple of years to pass. In the meantime, they would do well to cater to wealthy Indians who are a notch below HNIs in terms of wealth,” says Nishtala. Bala is of the opinion that simpler, open, easier-to-comprehend products and newer ways to transact online and through apps need to be developed. “Wealth managers must provide more real-time support through newer communication forms (besides the traditional face-to-face meets) that would act as on-the-go checks for customers. Complete and holistic solutions, such as consolidation of payment and investment services (account aggregation), are the need of the hour,” says Bala.