Calvin and Hobbes play this wonderful game called Calvinball. The key feature of the game is that it operates under rules, but these are “subject to be changed, amended, or deleted by any player(s) involved. These rules are not required, nor necessary to play Calvinball”. This game looks suspiciously like the Indian financial product intermediation space. All regulators can point to pages and pages of rules. But when you play the game, all these are ignored to form completely new ones as the game goes along.
But what is a great game for two is a complete disaster for 188 million investors who are hit by the three million sellers of financial products. The number of buyers and sellers is probably larger since these numbers are about four years old and come from the survey carried out by IIMS Dataworks in 2007, called Indian Retail Finance Markets. The numbers will be larger despite one part of the market quitting vending mutual funds and beginning to grow coconuts. Ever since the rules on the sales-side began to tighten and the entry load went to zero, those sellers of funds, who were just collecting a fee for getting the signature of the customer, are struggling. The larger operators such as banks and national distributors are nimbler since they have a basket of products on offer and can move seamlessly between a fixed deposit and a sector fund.
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But those looking at the smoke signals see the future of a sales side market with more rules than Calvinball. The atmosphere in the market reminds me eerily of a time almost 15 years ago when as a rookie reporter, I sat in front of one of the largest brokers of Delhi who had smoke coming out of his head. Literally. He was fuming at some new regulation that a nascent capital markets regulator was trying to push through. And he had just finished laughing at the ridiculous idea of a National Stock Exchange that would introduce the totally idiotic idea of online real-time trading. “Madum, this is India, all this online-shonline does not work here.”
Of course the guy is no longer in the pecking order of any kind today. I think he is growing some coconuts. For as the regulatory regime tightened, that is what he had threatened to do if this “(expletive deleted) Saby (Sebi) continued to kill the market”. Which is what is happening today. As the regulatory regime shows signs of formalizing the sales-side of the retail financial products, the noise comes from the three million sellers of financial products who protest. The 188 million investors either are part of the smart investor set and continue buying their funds and insurance products by choosing the least cost (both in time and money—and that could mean paying a financial planner to manage their finances) method or by staying out of the market while Calvinball tries to transform into the Fifa World Cup, complete with the yellow and red cards.
Both mutual funds and insurance products are showing signs of distress as investors are unsure of the market rules. In Calvinball, the only rule was trust. And that had different meanings for different people. In the new regulatory regime, there will be an institutionalized process and mechanism for selling the right financial products.
While the banks and the large distributors have the ability to invest in processes and will mostly adjust to the new regulatory system, there are tears for the small distributor who will lose his livelihood and may have to take to coconut farming. These tears were shed for the local kirana shop owner when the malls began coming in with their array of food products. Once the newspapers got bored of the stories of the small kirana shop owner going under and people looked around, we found that the local Garg Store had done a makeover. He now sells pickled gherkins and decaf with the same panache as kassori methi and heeng.
Yes, the small guy will be under pressure as he does not have the resources to play in a market with more rules. Some of them will quickly do a Garg Store and catch the next wave of business and move to an adviser-cum-seller role. For the others, there is trouble ahead. One idea coming from an ex-insurance senior manager is this—since less than 20% of the agents bring in more than 80% of the business, why not convert those into employees and use a system of salary plus incentives (like the rest of the organized workforce) to solve the problem? In fact, interesting experiments are already on in the mutual fund industry to see if the employee model will work.
The next two years are years of new creation. Those walking to Parliament to protest the change in market rules would use their time better to learn the new rules of the game. Calvinball is about to get over as the whistle for endgame nears.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is consulting editor with Mint. Send your comments at firstname.lastname@example.org