Financial empowerment is all about letting citizens participate in growth'

"Lack of education, forces us to go into real estate and gold rather than financial assets"


India remains one of the least penetrated countries when it comes to financial assets. Mail Today's esteemed panel - comprising Nilesh Shah, Managing Director of Kotak Mutual Fund, Anuj Mathur, CEO at Canara HSBC Oriental Bank of Commerce Life Insurance, and Rajiv Bajaj, Vice Chairman and Managing Director, Bajaj Capital - in conversation with Vivek Law, Editor, MONEY TODAY, deliberates on steps needed to increase financial inclusion in the country

Vivek: What is preventing us from achieving financial inclusion? Why is it that we are still obsessed with real estate and gold?

Nilesh: There are three basic problems. One is education. As Indians we have lost about $600 billion on our gold holdings. It could be more if you open temple vaults, but a $600 billion loss, and no comments about it. And in equity market, from top to bottom, retail investors have lost just $30 billion. And reams and reams are printed about it. So, for $30 billion, we have all the tears to share, but for $600 billion we don't even want to make a comment. This education, or lack of education, forces us to go into real estate and gold rather than financial assets.

The second thing is incentive. If I am a gold distributor, I can charge anything. I don't have to buy (back) the gold if I am selling it to you. There is no obligation on me. I don't have to do any KYC. I can accept cash. Third, if I want to do milavat in gold and sell 22-carat as 24-carat, that's perfectly acceptable. So, it makes more sense for me to commercially sell gold rather than anything else. And which is why we have more gold distributors and jewellers than mutual fund/insurance agents. We have also built barriers for entry of financial products in the market.

 I used to run a broking company and my application was rejected just because I couldn't do 47 signatures in the same fashion. I guess very few people will be able to write 47 signatures in the same fashion. You need separate KYCs for opening a demat a/c, a broking a/c or a mutual fund a/c. These are under the same regulator. If I've done KYC with one mutual fund, it is acceptable for all mutual funds, but this is not the case with banks. All these things put together have resulted in us losing $600 billion in gold and not making enough from equities.

Anuj: For me, financial inclusion is much more than setting up banking infrastructure. It's something to do with the saving and protection needs of customers. Recently, we did a study on life insurance needs of customers, on what is prompting or not prompting customers? I think we all know that so far insurance has been more of a push product. Nilesh very well talked about the challenges we have in terms of processes, but if you ask me, I think there are three pillars here - one is the right product proposition; the other is the process; and third is infrastructure. So, broadly, there are three things that are missing.

What we've seen of initiatives by the honorable prime minister is just scratching the surface a little bit in terms of the Jan Dhan Yojana and the Prime Minister Jeevan Jyoti Bima Scheme. On accidental insurance also, I think we have just scratched the surface as of now. What we need is awareness that insurance is about protection rather than an investing avenue.

Obviously, it also serves as a investment, but what is more important is protection. This is what we've seen with the Jeevan Jyoti Bima Scheme, which is a very simple integrated product. We were able to reach out to 10 per cent of our population with that, but it's just the beginning. And when we reached out to some people in the market, what came out was that people are actually interested in going for protection, but what is stopping them is a proper need analysis. So, that is something very important. I don't think people are interested in complicated products with riders and all that but in pure protection and wide coverage.

Again going back to the Prime Minister Jeevan Jyoti Bima Scheme, I think it's an excellent example wherein technology has been leveraged. The banking infrastructure has been leveraged, and in a short span of three-four months, we have been reaching out to roughly 10 per cent of the population. So, that's everything we need to look into.

The third pillar I talked about is infrastructure. That's very important. In this country with 1.2 billion population, unless and until we have the infrastructure to reach out to the masses, I think it will just be a dream. So, what is really required is to see what kind of infrastructure can support this need.

One thing we should be aware of is that cost will always be a challenge, and because of the spread of the country even LIC has not been able to penetrate Tier-3 and Tier-4 cities. So, if you are looking at penetration, I don't think insurance companies are going to set up branches across India. So, what we need to look at is the infrastructure. And I think banks provide that infrastructure in terms of reach.

Rajiv: What is financial inclusion? I went through the documents of the Prime Minister Jeevan Jyoti Bima Scheme, a leading force as far as financial inclusion is concerned. Financial inclusion is not only ability to do a banking transaction easily, which is very important, or access to credit. It is not only an ability to open a bank a/c easily, to give universal social security to a vast number of people in terms of health insurance, life insurance and basic pension. I think we need to go beyond that.

Financial empowerment is all about letting the society, our citizens participate in the growth of our country. Let's see the big picture. By 2025, India is going to add 1.5-2 billion to its GDP. At least 25 per cent population is ready to participate in this in some form. I recently returned from Japan.

I was surprised at how cheap that country is - in a restaurant for food, for a burger, for a bottle of water, we pay lesser than in India, because their society has not inflated. Whereas we have been inflating at 7-8 per cent a year. Now, what does that mean for our households?

Unless they beat inflation by 2-3 per cent, their lifestyle will not improve. That is what we are waiting for. You need to go from savings to investments and invest in capital markets. It could be debt, it could be equity, it could be a combination of the two. We have a Rs 12 lakh crore mutual fund industry as well as the insurance sector that offer a series of avenues.

Growth of distributors is the infrastructure we need. There are one lakh registered mutual fund advisors. How many of them are earning more than Rs 10 lakh a year? In India, only 1,200 people earn more than Rs 10 lakh a year selling mutual funds.

Everybody works for rewards, recognition and respect. There is no recognition and there is no respect. My humble submission would be that India, with 125 crore people, over a period of time will need 50 lakh people in financial distribution. You know these numbers of 10,000-20,000 will not do. LIC is the only beacon which has created a large agency. But even today, many of them do not earn very well. If you ask somebody, will you marry your daughter to them, they won't? So, we need to make financial advising and financial planning respectable professions.

Vivek Law: Yes, we had concerns of high cost.. the regulator moved to the other extreme. What did you mean when you talked about incentivising?

Anuj: For selling real estate, a distributor gets a far higher commission than for selling financial products. For selling gold, he gets a far higher commission than for selling financial products. Within financial products, there are different incentives. Today bankers are selling because they are getting great subsidies on CASA. We need common bench marking for distributing financial products.

There is no point in reducing just one segment incentive. That's likely to backfire. In fact, if we believe the estimated betting which goes in IPL, that's more than the equity flows which we receive in a year. In a place where they are likely to lose money, people are willing to put more money, and in a place where we are compounding wealth at 20 per cent per annum, we are getting fewer groups.

Vivek: How are you looking at the digital space, especially as the younger audience is doing more and more transactions online. As an advisor, is there a potential? Will it lead to better distribution?

Rajiv: There is almost an extreme expectation that it will replace traditional distribution. We have done a lot of deep thinking about our company's future. We are going to leverage technology in a big way, but more in internal processes. In consumer processes, there has been heavy use of technology. This is a face-to-face business. We need a make a much more engaged conversation face to face. And it is 15-30 minutes conversation.

So, whether you are talking to a tribal in Nilgiri Hills or trying to sell a Rs 1,000 NPS or are speaking to a high net worth individual in the Bandra Kulra complex, it is a very engaged conversation where you need to talk about inflation, you need to talk about comparisons , why they need to beat inflation.

Who is the financial educator? Who is going to educate you? Educator is the person who goes and meets 5-10 investors face to face, it is that LIC agent. It is that private insurance company agent. It is that mutual fund distributor. They are the people who meet face to face, burn fuel, go in the sun and sit face to face and educate.

I do not think it will be replaced. It will be a great combination of technology and face-to-face connect. There could be a tele-advise model. There could be video chat in a certain segment. But only as support. It is a combination model. We cannot overlook the need to have those five million people selling financial products.