If in the 1950s somebody wrote a future finance story about India, they may not have predicted the market that faces a retail consumer today. Till the 1990s, your savings and investing decisions were dependent on the government. No wonder Indian households chose gold and real estate as saving sumps. The financial sector was a reflection of the overall direction of the economy. Costs were high, service poor in state-owned and run finance. But post 1991, change came suddenly to finance and this column maps some of those changes as India celebrates 70 years of political and 26 years of economic freedom.
Banks
The cracking open of the Indian economy in 1991 spilled over to finance. A new set of entities were given banking licenses. Axis Bank Ltd (earlier called UTI Bank), HDFC Bank Ltd, ICICI Bank Ltd were banks of the 1990s. With hungry-for-business private-sector banks in the marketplace, there was an infusion of products, services, technology and choice. By the 2000s we began to forget the tyranny of the sweater-knitting bank clerk who refused to budge, the sweltering lines at the cash counter and the time it took to clear outstation cheques. The next crop came in the 2000s—Kotak Mahindra Bank, Yes Bank Ltd—as a few more got banking licenses. Then more recently the real expansion of banking with payments banks, small banks and Bandhan and IDFC Bank getting licenses. Banks morphed from places you kept money safe to product-vendors by 2010, specially in the private sector. Most urban middle class bank customers have stories to tell of being mis-sold life insurance policies by their bank branch. The regulator is still playing catch up.
Stock market
In 1991, the Indian stock markets was a closed club of brokers, transaction costs were huge, the price at which investors bought or sold were opaque since it was an outcry market. It could take a month or more to get the physical share certificates and a signature mis-match could mean more delays. It took the Harshad Mehta scam in 1992 to trigger big market reforms in India. In the same year, the market regulator Securities and Exchange Board of India (Sebi) was given the powers that had eluded it since its birth in 1988. In 1994, the screen-based National Stock Exchange (NSE) was set up, breaking the virtual monopoly of the BSE. Other parts of the market that we today take for granted got created as well. Reform on the stock markets meant cheaper, faster and transparent transactions. While the markets have become better, the number of retail investors has stagnated. And for a good reason too. That reason is mutual funds.
Mutual funds
The monopoly of Unit Trust of India (UTI) was hardly dented when public sector entities such as banks and insurance companies were allowed to enter the mutual fund business in 1987. But real change began in 1993 when the private sector was allowed in. In the backdrop of the big stock market scam, mutual fund regulations were made keeping safety of retail investors in mind. The three-tier mutual fund structure—with the money being held by a Trust for the investor, with the asset management company (AMC) as a fee-for service provider—has gone a long way to prevent fraud in this industry. It took another market failure with the implosion of US-64, the popular mutual fund scheme, in 2001 for the erstwhile monopoly UTI to follow Sebi's mutual fund regulations. From 2006 to 2016, Sebi went on pushing the industry to become investor friendly. Removal of the front commissions in mutual fund products in 2009 paved the way for innovation, upgradation of distributor skills and the birth of a vibrant advisory business. By July 2017, retail investors were pumping over Rs5,000 crore into equity funds a month through systematic investment plans (SIPs). With assets under management (AUM) of Rs20 trillion, the mutual fund industry is nipping at the heels of its fund management rival—the insurance industry.
Life Insurance
In 1956, all 245 insurance companies were nationalised to form the government-owned LIC. By the 1970s, it had become the synonym for life insurance in India. Its role in providing an avenue for long-term guaranteed return corpus building, at a time when there were few other choices, cannot be discounted. "LIC kara lo (get an LIC)" is still a phrase heard in middle-class homes as the young adults of the house begin to earn. The government set up the insurance regulator in April 2000 and by August of the same year, the market was thrown open to the private sector. The post-privatisation period saw the launch of a new product: the unit linked insurance plan (Ulip). This was the new improved, transparent, market-linked product the private entrants brought to the market. Unfortunately, the regulator dropped the ball and allowed the old architecture to be used by Ulips. India saw the systematic loot of household savings in an unprecedented manner in a regulated industry. In 2010, Ulip rules were cleaned up but not those of the traditional plans. The mis-selling now continues in traditional plans. The industry is unable to keep even half its business alive after five years of sale of 15-20 year tenure polices. The Rs29 trillion AUM of life insurance industry in India does more fund management and less of life insurance. The way ahead is less of fund management and more protection.
Pensions
The Indian pension story could have come right out of the 1975 Hindi movie Sholay: "Product ek, regulator chaar? Bahut beinsafi hai (One product and four regulators? That is very unfair)." The labour ministry oversees the Employees' Provident Fund Organisation (EPFO) that manages a salaried employee's pension funding vehicle, the compulsory contributory provident fund scheme. Pension products are also sold by the insurance industry and the mutual funds industry. In 2009, India got its low-cost, market-linked and transparent pension product, the National Pension System (NPS), under the oversight of the pension regulator, the Pension Fund Regulatory and Development Authority (PFRDA). The retirement corpus-building Indian has to now choose regulators along with products. The NPS is the world's lowest-cost pension product, but suffers from a few flaws—such as compulsory annuitisation of a part of the retirement money. Given the shoddy annuity products in the market today, the compulsory annuitisation is a big deterrent to money flowing into the NPS.
Seventy years of household finance in India have seen big changes in the market. The next 10 years need work on consolidating the gains. The implementation of the Indian Finance Code that looks at a two-regulator model in India—the Reserve Bank of India and a Unified Regulator that is formed by merging all the other financial sector regulators—is the way forward.
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