Bank-owned asset management firms to benefit in new regime

Bank-owned asset management firms to benefit in new regime

Mumbai: Bank-owned asset management companies (AMCs), and those that don’t depend hugely on distributors to sell mutual funds, will enjoy an advantage over others in the Rs7.5 trillion Indian mutual fund industry after the recent regulatory changes, said a report of consulting firm McKinsey and Co.

Capital markets regulator Securities and Exchange Board of India (Sebi) has recently banned AMCs from charging investors upfront fees. It also clamped restrictions on the so-called exit loads. There are 38 AMCs and roughly one-third of them are owned by banks. The Sebi move has forced AMCs to take a new look at their revenue models as they now cannot charge sales and distribution expenses to investors.

According to the McKinsey report, the importance of proprietary channels will increase as bank-owned AMCs look to leverage captive infrastructure.

“We believe that players (companies) with proprietary channels such as banks, NDs (national distributors) may have a competitive edge. The ability to leverage proprietary channel infrastructure and reach while retaining all economics within the group will provide a significant advantage to a few AMCs," Joydeep Sengupta, Naveen Tahilyani and Raj Kamal of McKinsey said in the report titled Business impact of regulations in the Indian asset management industry: Playing in the new market place.

The top five firms in the industry today are either bank-sponsored or have captive distribution channels, and account for at least 50% of the industry by assets managed.

Industry leader Reliance Capital Asset Management Ltd has offices across 300 locations. It also has Reliance Money Ltd, a broking and distribution firm with a presence in over 5,000 centres across India. It managed assets worth Rs1.17 trillion in August.

The next two companies are HDFC Asset Management Co. Ltd and ICICI Prudential Asset Management Co. Ltd, both owned by banks. HDFC Asset Management had Rs93,874 crore average assets in August and ICICI Prudential managed close to Rs78,000 crore.

UTI Asset Management Co. Ltd, the fourth largest AMC with around Rs74,000 crore in assets in August, has a presence in 103 centres across India. UTI AMC is owned by three public sector lenders—State Bank Of India (SBI), Punjab National Bank and Bank of Baroda—and state-owned Life Insurance Corp. of India.

Birla Sunlife Asset Management Co. Ltd, which manages Rs62,866 crore, will benefit from the 40-branch network of Birla Sun Life Distribution Co. Ltd, the report said.

Among the rest, SBI Funds Management Pvt. Ltd (Rs34,056 crore), Canara Robeco Asset Management Co. Ltd (Rs7,892 crore) and Baroda Pioneer Asset Management Co. Ltd (Rs5,414 crore) will also benefit from their parents’ large network of branches. Indian public sector banks have a nationwide branch network and SBI leads the pack with at least 10,000 branches.

Independent AMCs will have to look at developing a direct selling model based on online platforms, the McKinsey report suggested. The use of remote channels such as Internet, mobile phones and call centres will come in handy for selling mutual funds in a cost-effective way. “There is room for a potential evolution of IFA (independent financial advisers) platforms/roll-ups offered by AMCs or other intermediaries as IFAs look to create an institutional brand and get sales support to position themselves as true advisers."

Internationally, AMCs in Australia and parts of Europe have successfully used independent financial advisers to sell mutual funds. They earn fees from the mutual fund buyers and not the AMCs.

According to Sundeep Sikka, chief executive officer of Reliance Capital Asset Management, too much attention is being paid to the regulatory changes, and it’s time to get on with the business. “If you keep the pebble close to your eye, it blocks your vision and you get an impression that it’s the end of the world. But if you throw it away, it becomes insignificant."

He said new firms will find going difficult now as focus will shift from distributor push to brand building and track record of firms. “The entry barriers have gone up. You won’t be profitable until you have Rs10,000 crore in assets. But getting to this mark is going to be an uphill task without a track record or a credible brand."

At least half a dozen firms are awaiting regulatory approvals to start AMCs and a dozen more have announced plans to enter the industry. The latest to get the Sebi nod to start an AMC is Axis Bank Ltd.

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