A combination of growing numbers of high net worth individuals and families and greater willingness to engage with the wealth management industry represents a considerable opportunity for providers of private banking services in India.
The recent general election may have served to highlight the economic issues facing India, but to borrow a famous political phrase the ‘haves’ have never had it so good in the world’s second most populous nation. WealthInsight’s December 2013 high net worth individuals report predicts that the number of high net worth Indians will grow by 85% between 2011 and 2015 and that their assets will almost double over that period. Forbes reckons the number of Indian billionaires rose from 48 in 2012 to 55 last year, while Kotak Wealth Management’s third annual ultra-high net worth survey points to a likely threefold increase in the number of households with a net worth in excess of INR250m ($4m) over the next five years.
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According to McKinsey, more than 60% of assets under management in India are from clients with wealth in excess of $40m based in either Mumbai or Delhi, although the wealth base in other metropolitan areas (notably Chennai and Bangalore) is growing rapidly.
The relationship between high net worth Indians and the wealth management industry has become much closer in the last 4-5 years as the second generation takes charge of family businesses. Often western-educated, they are engaging with wealth managers on issues such as tax structures and succession planning to a much greater extent than their parents.
Private banking services in India are typically delivered by three kinds of institution – large multinational banks (including Citi, RBS and Credit Suisse), local banks (for example, Kotak and Axis) and local non-banking entities such as IIFL.
McKinsey’s 2013 global private banking survey reports that assets under management at private banks in India doubled between 2010 and 2012 and that profit margins have also risen. Indeed, the profitability of Indian private banks (with a margin of 38 bps) is now close to the level of their European peers.
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By GlobalDataAdvisory dominates
Traditional advisory continues to be most desired service for clients in India, explains Amit Khandelwal, director private banking and wealth management Credit Suisse India. From the product perspective there has been increased demand for alternative assets since traditional debt and equity has been under pressure due to adverse market conditions. Making credit available to clients to bolster their business growth is another significant development.
"The product-based, commoditised approach that some private banking organisations have taken is not allowing them to charge fees," he observes. "As long as they are keeping advice and value additions as their core offering, clients are willing to pay."
Other value added services such as trust structuring are also gaining traction, says Naveen Tahilyani, director McKinsey & Company. "Private banking assets under management are expected to reach around $85bn this year, which represents approximately 9% of overall high net worth assets."
That fact that this percentage has almost doubled since 2009 supports his view that engagement with wealth managers is increasing. "Although the current portion of assets under management under advisory mandates is limited to around 25%, there is a clear emergence of a sub-segment which is ready to pay for advice, especially among the salaried and professional demographic segments. Private banks are expanding distribution in some of the top 20 cities to attract more high net worths and increase the engagement of existing customers."
Private banks have looked to capitalise on this by capturing the Indian high net worth’s fondness for real estate through structured products, he adds. "Non-convertible debentures from selected developers have emerged as big product categories, though with some credit risk. There has also been a focus on the entrepreneur segment with many players (especially the full service banks) trying to fulfil credit needs."
Until the first quarter of this year, Indian capital markets were moribund and most of the money was flowing into fixed income through fixed maturity plans, explains Sameer Kaul, head of Citi Private Bank India. "In the past few months, there has been a fair amount of eagerness to invest into capital markets, especially equity-linked products."
Size determines engagement
He says engagement with wealth managers depends upon the client’s portfolio size. "Large family offices are more likely to invest directly with asset management companies and enjoy the benefits of higher net asset value. Ultra high net worth individuals seek differentiated products from their wealth managers in terms of structured products or high yield coupon, paying instruments that invest into asset classes like real estate."
According to Kaul, clients are increasingly interested in using the liberalized remittance scheme to send money outside of India. "This not only helps diversify currency risk but also helps clients diversify the geography in terms of where their money is invested. We see a preference for jurisdictions such as Singapore that are safe and secure from a banking perspective."
Rajesh Iyer, head of investment advisory services & family office at Kotak Wealth Management reckons the private banking sector has the capacity to grow by at least twice the rate of overall GDP growth given demand from wealthy individuals for assistance in finding investment opportunities. "Investment research and recommendations, reporting platforms and analytics and asset registers are the services in most demand. There is also increased awareness of family office services and estate planning."
The extent to which high net worth individuals engage with wealth managers and are prepared to pay for advice depends on their existing support infrastructure, he continues. "Those who have strong internal teams of experts use wealth managers for ideas and opinions, while those that do not have any internal support team depend on their wealth manager."
He agrees that most high net worths do not take full advantage of opportunities to send money outside India as they are more confident of investment opportunities and returns within the country.
"The last few years of INR depreciation was a classic example of how diversification of assets can help a wealthy investor maintain lower volatility on their portfolio and enhance returns to maintain purchasing power parity globally. Investment ideas include equity, debt, deposits, real estate funds, gold and quantitative model-driven opportunities, some of which are not available in India. Pick up in global economies has also made a case for looking at taking directional equity exposure to markets like the US and Europe."
According to Umang Papneja, chief investment officer IIFL Wealth Management, basic private banking offerings like asset allocation and financial and tax planning are now taken as read. "Comprehensive reporting, product due diligence and product pipeline and family office services are most in demand and these have become the key differentiators. Concierge services have not yet become a part of India’s private banking landscape."
Family values
He says that the family office concept has gained significant acceptance since the global financial crisis and has set a high bar for private banking service providers in terms of client servicing, reporting and offering unbiased advice. "It has also raised entry barriers for new advisors, making the existing client-private bank relationship stronger. We hope that this will lead to longer term relationships as the client will ultimately consolidate this wealth within these family offices."
Another emerging trend is client involvement in decision making, leading to greater understanding of products and willingness to experiment with new product types. "The current generation has a keener understanding of capital markets and as a result, most of our clients understand what they are buying into and will often ask us for product simulation or reiterations or enquire about the global track record of similar products. This introduces product transparency (even if it is out of compulsion) and product innovation."
Papneja adds lack of tax treaties and currency risk to the list of factors that have discouraged wealthy Indians from transferring funds outside the country.
"Persuading wealthy clients to have more of their wealth managed within India is not really an issue for private banks. Because of restrictions on capital account convertibility, most wealthy individuals and families manage their wealth onshore and because returns in India have been good over a cycle, most investors are happy to stick with this approach. Financial assets represent just 7% of total savings in India and most savings get channelled into real estate or gold."
The Securities and Exchange Board of India has attracted praise for its efforts to update advisor regulation, particularly in relation to the payment of commission. Fund distributors are forbidden from also acting as advisors, which separates advice from the execution of that advice.
WealthInsight expects the wealth management sector to be subject to increased regulation over the next few years, but suggests that such regulation will be a net positive for the industry as it will clarify and streamline taxation and the regulatory structure. With the number of potential customers set to rise further, the next few years could be something of a golden era for private banking in India.
