Why is financial saving falling?

Indians are saving less. Gross domestic savings has fallen from 36.8% of gross domestic product (GDP) in financial year (FY) 2008 to 30.8% in FY13. Financial savings of households dropped from 11.6% of GDP to 8% during the same period. On the other hand, in the past five years, returns from real estate have overwhelmed the convenience that financial products provide. During this period, there has been a reasonable drop in the number of investors trading on a stock market or having demat accounts or investing in mutual funds or having credit cards. And this drop is there despite regulators making financial market infrastructure as safe and solid as one can expect it to be.

A tectonic shift is likely to occur in the near future. As returns from physical assets start moderating, financial savings will be more favourable. Real estate returns should moderate as supply emerges and the law of averages catches up.

Gold is an enigma. It is difficult to understand why buyers are willing to incur an upfront loss of 15-30% (11.5% import duty and 5-20% premium depending upon denomination) on the fair value of gold.

There are many reasons behind the low level of penetration of financial products. Lack of awareness (though a lot of ground has been covered with the help of media, regulators and companies spreading investor education); lack of distribution (distributing financial products is not as remunerative as physical products); prevalence of black money (real estate and gold can accommodate black money unlike financial products under regulated entities); investor experience (may be negative for most traders but overall experience is positive for investors across equities and fixed income products, except in the past five years on a relative basis); human touch points (the number of people selling jewellery or real estate is multiple times that of those selling financial products).

It may be that the difficulty of doing transactions in financial products has not received as much attention as it deserves and this acts as a demoralizer for savers.

Opening of demat account or filling a form for an initial public offering (IPO) is a daunting task despite many simplifications. Small print, a number of undertakings and jargon loaded language results in an investor postponing her decision regarding the financial product. Looking at the paperwork, many investors stumble at the entry point itself. If their experience with one service provider is not good, they quit the financial market altogether rather than shifting to another service provider due to the fear of fresh paperwork.

Ease of transacting remains an issue in most financial services other than banking. Application for an equity or bond IPO, subscription or redemption in mutual funds or insurance, for instance, has not reached the same level of ease with which one operates a bank account or withdraws cash from an automated teller machine (ATM). Internet has the potential to make the transaction experience easy for a certain class of investors. However, the plethora of ever-changing passwords and login identities, and keeping records of actual transactions for multiple service providers makes netbanking a difficult experience. The safety and simplicity of an ATM card with a four-digit password is yet to be found in the world of Internet.

Multiple know-your-customer (KYC) rules at the time of entry across different sectors such as banking, insurance, mutual funds, etc., require hand holding. Updating KYC records periodically is time consuming. Going through repetitive KYC processes for renewal or additional products from the same entity, or for buying a product from a new entity in the same sector tires even the most die hard fans of financial products.

Keeping records of investments and transactions is an insurmountable hurdle. The convenience of a bank passbook is missing from other products. Searching for records of transaction at a later date or furnishing proof to tax authorities takes away a few weekends. Rules regarding nominations, transfer on succession, etc., are different across various financial sectors, thus creating confusion among investors.

More importantly, if there is any deficiency in service delivery, then the corrective process is not only time consuming but is also loaded against the investor.

I have not received an interest payment on my demat debenture holding due to some data error a few weeks ago. I have also not received a bond interest payment which was due in 2004. I gave up on it after following up for about five years. Now, they have sent me a reminder to claim the same, after a gap of nine years.

I have to complete the following process to get a fresh interest warrant. Submit a copy of bond certificate (even though I have already done this to claim the redemption proceeds), bank account details along with a copy of a cancelled cheque (though there is no change in the details already given), signatures of bond holders duly attested by bank (there is no change in the signatures of bond holders), latest address proof duly certified (there is no change in the address, and 13 other interest and maturity cheques have been encashed using the same address), self-attested copy of Permanent Account Number (PAN) card of the bond holders (there is no change in the PAN details of the bond holders), and the original interest cheque (as if I have kept this as a souvenir). The whole process is designed in such a manner that an investor rather not attempt to recover her dues.

Ease of transaction in a financial market is very important for investors. Certain processes aimed at correcting deficiency in service need to be balanced in a fair manner so that the investor feels comfortable with the remedial measures.

After Mint: According to Financial Times, Italy’s Corte dei Conti has recommended suing rating agencies for €234 billion for not considering Italy’s history, art and rich heritage while downgrading the country during the financial crisis.

Nilesh Shah, managing director and chief executive officer, Axis Capital.