Home / Opinion / Online-views /  What happens when a `20,000 crore industry is tamed?

What we know anecdotally is now there as data in the Reserve Bank of India annual report 20011-12, that Indian household savings are moving from financial assets to real assets. The household savings rate has remained almost constant at about 23% of gross domestic product (GDP) (at current market prices) but there has been a portfolio reallocation within this broad number. Net financial savings of households (remove home loans and other personal loans from gross financial savings to get the net figure) have dropped from just over 12% in 2009-10 to just below 8% in 2011-12. Valuables, like gold, have more than doubled their share from 1.3% in 2008-09 to 2.8% of GDP in the last financial year. The slowdown has been most severe in small savings, bank deposits and life funds. Go deeper into the numbers and you see that households pulled money out of mutual funds in 2011-12 and invested less in insurance funds. We invested 33,000 crore in mutual funds (MFs) in 2009-10, but pulled out 10,600 crore last year. We bought 2,59,800 crore of life insurance in 2008-09 but bought 36,400 crore less ( 2,23,400 crore) last year.

Now that the data is out I suspect there is going to be a witch hunt to find the culprit for this decline in the household’s holding of financial assets. India was going to turn a nation of gold and land investors into holders of financial assets through the privatization of insurance and mutual funds. But something has derailed the process and a reading of smoke signals tells me that the blame will be pushed on tighter regulations in both these industries. The buzz in Delhi that refuses to go away is this: the lobbyists are in over-drive, both in the Prime Minister’s Office and in North Block. Their aim? To turn the clock back on the investor-friendly regulatory changes carried out since 2009. The lobbyists’ argument goes something like this: equity markets are down in India due to the lack of household participation in financial markets (now the data proves at least the latter point). This has happened due to the regulatory changes in both insurance and MFs (fact: regulatory changes have happened). India needs deep and happy stock markets to carry out the disinvestment programme (the minute lobbyists begin to bleed nationalism, you know something has hurt them and the stakes are really high). We need to turn the clock back to get our markets buoyant again. Of course, this argument totally ignores the fact that equity markets are down 16% since 2008 mainly due to a slowdown in growth and a lack of government action on policy and reforms and an unravelling of the India story.

But let’s go back to the lobby story. The persistence and strength of the push-back on regulation should tell us that there is big money at stake. In finance, as in most other things in life, we need to follow the money to see whose business interests got upset in the regulatory changes in this argument. The sellers of MFs and insurance took home just over 20,000 crore in 2010-11. This is lower than the 23,000 crore a year ago mainly on account of the reduced commissions from MFs that dropped from 5,000 crore to 1,800 crore from 2009-10 to 2010-11. The insurance commissions grew marginally from 18,000 crore over the same period to 18,300 crore, a growth of just 2% compared with the 16% growth in the previous year. Though the 2011-12 Insurance Regulatory and Development Authority (Irda) annual report is yet to be uploaded, chances are that commissions have been squeezed a bit more in the last one year. And therefore the push to turn the clock back.

The year 2009 saw MFs go no-load when the regulator asked the question: “whose agent is he" and came up with the answer that the principal must pay the agent from his own pocket or the consumer should compensate the seller through fees. This lead to the removal of the cost of distribution that was embedded in the price of a fund as funds went no-load. This is a fairer system that prevents large scale churning by sellers. In 2010 the insurance regulator moved the unit-linked insurance plan (Ulip) from being a high cost trap for investors into a well-structured product. This stopped the large scale loot of investors in the market and reduced the incentive to sell. Of course, the insurance industry immediately switched to selling the higher cost and opaque traditional plans, but that is for another column. Both these changes took the froth out of the market. Incentives that were driving very sharp sales took away the casual seller of these two products who were just getting compensated for owning some customers. In the MF space this has led to a consolidation of the distribution industry that is now forming associations and understands the merit of upgrading of skills and wants to give a value add. The insurance seller, used to much higher pay-offs, is still to come to terms with this change. Of course, that the “mota maal" sellers are now banks should tell us where the lobbying comes from.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

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