Debashis Basu: Signs Of Premature Ageing?
Sometime in March 2008, two very smart and wealthy investors were explaining to me the reason behind their large stakes in two listed financial services businesses: rising prosperity and swelling savings are bound to create long-term growth for financial services companies. Both the stocks are down 80 per cent over the almost four years since. This is not a comment on their stock-picking prowess, but the flawed assumption that, since people are earning and spending a lot, they would also willingly write cheques for lakhs of rupees if the bank relationship manager pushes the next "child plan" or a Nifty-linked debenture. That they will lap up the stock tips they get on their cellphones from their stockbrokers - or from the media.
The financial services sector is one of the most visible, offering high salaries and employing large numbers. Lakhs more are in the queue to join it from business schools and different financial courses. At any time you can be bombarded with hundreds of insurance products (life, medical, car, travel and others), over 3,000 actively traded stocks, more than 1,000 mutual schemes, portfolio management schemes and loan products, from home loans to car loans to credit cards. These are pushed by over 600 brokers, 1,000 financial planners, 20,000 active independent financial analysts, over 3 million insurance agents, 25 to 30 banks and their "relationship managers", half-a-dozen websites for comparison and purchase online, dozens of print publications and six to eight TV channels bombarding retail consumers with advice, advertisements and tips.
And here are the ground realities:
- Half the life insurers are in the red, despite more than a decade in business. The other half are fudging their numbers, says the CEO of a mutual fund.
- It is getting worse. The first-year new-business premium of life insurance companies declined on an average by 40 per cent in the last seven months.
- Every general insurer is making losses in its retail portfolio. Claim payouts in health insurance are 120 per cent-plus.
- In five of the first nine months of the year, fund companies suffered outflows in equity funds. They had a terrible 2010 as well.
Interestingly, Indian credit-card issuers like HDFC Bank and Axis Bank are expanding rapidly. Why aren't Indian savers making the excellent rational choice to insure their lives, their homes and their health? Why aren't they flocking to financial planners and, after spending tens of thousands on sound advice, pouring money into equity mutual funds and bond funds in the proportion that their "risk profile" would dictate?
It is the stock market, goes the argument. When the market recovers, all will be fine. (If it is, the industry is in bigger trouble. But that's a different issue.) Indeed, private mutual funds have been around for 17 years, insurance companies for 15 years, and stockbrokers for decades. If the business model now is to wait for a market rally for the business to survive, there is something fundamentally wrong. Will a 25 per cent market rally in 2012 bring in enough customers to convert loss-making businesses into profitable ones? Why have prosperous Indians not felt the "need" to actually "consume" financial services? The blame lies squarely with financial services companies and the regulators.
Regulators: this is not the place to discuss how regulators have systematically messed up over the last five years, but here are some pointers. The securities regulator, the Securities and Exchange Board of India (Sebi), wanted distributors to earn commissions directly from investors. A good idea, perhaps, but the way it was handled showed Sebi knows nothing about the fundamental difference between financial services and consumer products (a point elaborated on in my previous column). This killed the mutual fund business. It then embarked on further regulations - such as that distributors should disclose their fees on websites - and now wants to get into whether to ban the payment of upfront commissions. The know-your-customer norms remain a nightmare. The effect of all this is to throw a spanner in the business model itself.
The insurance regulator has not been far behind, allowing unit-linked insurance plans, or ULIPs, in early 2000 that destroy wealth - and then regulating them in 2010. It wants to tighten the screws on agents and wants banks to sell more insurance. Except that insurance company CEOs tell me that bank mangers neither know the products nor are interested in selling insurance.
Companies: currently, financial-services companies have a flawed model. They have too many products, which impede understanding, communication and transaction. They design products that are complex and may not deliver. They surround themselves with impenetrable call centres. They are run by executives who have may have been pushing credit cards yesterday but are selling mutual funds or insurance today.
Finally, while companies and regulators are messing about in one corner of the market, at another corner are millions of prospective customers. The two are miles apart. The real worry should not be whether the markets will rally in 2012. The worry should be that - from products, to the number of players, to regulators, to the millions of prospective customers - all the elements of growth are in place, and yet the sector is not growing. Call that premature ageing.