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• Cognizant 20-20 Insights




Private Banking in India After the
2008 Financial Crisis
The expansion of private banking in India continues in tandem with
the country’s growing wealth. However, the industry continues to be
hamstrung by regulatory and technological factors.

      Executive Summary                                     This paper takes a look at the PB business in
                                                            terms of:
      Until 2008, private banking (PB) existed in India
      largely as an investment advisory service offered     •	 The role of banks and customers/investors in
      by a few banks. PB services were offered as part        bringing about a change in the way PB business
      of the overall banking services package. They           is conducted in India.
      were rarely rendered by trained resources. The
      products were also limited to traditional offerings
                                                            •	 The importance of PB and distribution of third-
                                                              party products (TPPs) as revenue sources in
      such as deposits, mutual funds, insurance and
                                                              an era of decline in the traditional sources of
      bonds. After the 2008 financial crisis, a number
                                                              revenue.
      of changes occurred:
                                                            •	 The drawbacks in the way the business is being
      •	 Though India remained largely insulated              conducted in India and the consequent impact
         from the crisis in the financial markets,            on stakeholders.
         the widespread media coverage increased
         investors’ awareness of the products and
                                                            •	 The steps required to ensure that the Indian
                                                              PB industry meets global standards in terms of
         services available globally.
                                                              infrastructure, human capital, mindset, etc.
      •	 Investors began considering alternative forms      •	 The role of regulators and whether they are
        of investments such as private equity, REITs,
                                                              equipped to handle the demands of the PB
        structured products, currencies, commodities,
                                                              business.
        bonds, etc.
                                                            •	 Scope  for consulting firms in the develop-
      •	 This new breed of investors began demanding          ment of IT infrastructure for banks and other
        more from their banks and from their private
                                                              financial institutions.
        bankers in terms of services, products, returns,
        reports, information, etc.                          Rise of Alternative Investment
      •	 Indian  banks and financial institutions           Opportunities
        responded by beginning to provide PB services       A positive effect of the financial crisis of 2008
        that were more in tune with global offerings.       was that it familiarized Indian investors with




      cognizant 20-20 insights | november 2012
words such as sub-prime, securitization, collateral                     Private Banking in India
debt obligations (CDOs), mortgage-backed
                                                                        The economic reforms launched in 1991, the
securities (MBS), etc. Investors came across
                                                                        subsequent high growth rates in the information
several investment products that were common
                                                                        technology enabled services (ITES) and manufac-
in developed markets in the West. Products such
                                                                        turing sectors, the opening up of capital markets
as private equity, real estate investment trusts
                                                                        and the corresponding rise in income levels con-
(REITs), junk bonds, etc., which had hitherto
                                                                        tributed to the emergence of specialized banking
been the preserve of a select group of investors,
                                                                        and investment services in India.
became known to the broader class of investor.
                                                                        Some relevant statistics outlined in a recent
Investment products that provided the opportu-
                                                                        Kotak Wealth Management-Crisil research report:
nity to invest in unlisted companies, real estate,
art, gold, silver and other precious metals as well                     •	 There are an estimated 62,000 ultra-wealthy
as in previously unexplored sectors such as enter-                           households in India (2010-11 E), which is likely
tainment, retail, logistics, etc. provided the kind                          to grow to 219,000 by 2015-16.
of diversification that investors sought. The fall in
the stock markets and the failure of global banks                       •	 From three billionaires in 1996 to eight in 2004,
                                                                             to 55 in 2011, India currently comes third after
and financial institutions had raised concerns
                                                                             the U.S. and China in terms of the number of
about the solvency of such entities even in the
                                                                             billionaires.
Indian scenario.
                                                                        •	 The total net worth of India’s ultra-HNW indi-
In response, banks and other financial institutions                          viduals is expected to increase five-fold to
began recommending such products to their high                               Rs235 trillion by 2015-16.
net worth individual (HNI) clients. These products,
apart from having a high investment threshold,                          •	 Ultra-HNIs invest up to one-fifth of their income
                                                                             for growing their wealth.
also required trained and qualified bankers/advi-
sors who could recommend, service and provide                           However, the most interesting statistic is given in
information on such products. Banks therefore                           Figure 1:
began offering investment advisory services to
HNIs under the private banking umbrella.


Projected Change in Investment Strategies for HNIs

         Ultra-HNIs investing strategy has been simple so far...        ...but their investments in more complex asets are poised to rise.
                                                                                                2009-2010 E   2010-2011 E   2011-2012 P




                                                                        Alternative Assets           9.5%       9.3%           11.2%



          37.4%           33.1%           20.4%         9.3%

        Real Estate       Equity          Debt     Alternative Assets
                                                                               Debt                  20.8%     20.4%          18.2%




                                                                              Equity                 31.6%      33.1%         30.1%




                                                                           Real Estate               38.1%      37.4%         40.5%


                                                                         E: Estimated P: Projected




Source: Top of the Pyramid T.O.P India-Decoding the Ultra HNI-2011—Kotak Wealth-Crisil Research.
Figure 1



                              cognizant 20-20 insights                   2
According to this survey, the traditional avenues     the rapid growth of private banking services in
of investment viz. equity and debt are likely to      the country.
give way to real estate and alternative assets. In
fact, investments in these two will record growth     It is also possible that following the financial crisis
at the expense of equity and debt, with alternative   banks found it easier to convince investors to
assets growing the most on a percentage basis.        consider alternative investments. The regulatory
                                                      changes in the Indian financial and investment
Why is this likely to happen?                         sector (viz. abolition of entry load on mutual
                                                      funds and subsequent cap on brokerage paid out
•	 Rising income levels and surplus funds.            to distributors) may also have prompted banks
•	 Investors’ willingness to look beyond tradition-   and other financial institutions to recommend
  al equity and debt instruments.                     alternative investments. (On the basis of upfront
                                                      commission received, banks earn more from
•	 Falling
         returns and increased risk perception
                                                      alternative investments.) Lastly, amid falling
  associated with traditional equity products.
                                                      revenues from other sources (NIMs, low credit
•	 The perception that risk associated with alter-    off-take, higher cost of deposits, etc.), private
  native assets and real estate can be controlled     banking services and alternative investments
  and managed.                                        were a newer source of revenue.
•	 The  emergence of previously unexplored
                                                      Alternative Investment
  investment options — e.g., vintage cars, art and
  antiques, coins, wine, etc.                         Options in India

•	 The  emergence of previously unexplored            •	 Private equity funds: These funds allow HNIs
                                                          and UHNWIs to invest in unlisted companies.
  investment avenues such as private equity, real
                                                          Such companies usually have a business
  estate, art funds, REITs, film production and
                                                          model and a steady revenue stream. PE funds
  funds, etc.
                                                          generally have a mandate to invest in every
•	 The emergence of exotic debt instruments.              sector except real estate. In India, these funds
•	 Banks and financial advisors, hit by falling           have been investing in relatively unexplored
  revenues from traditional banking and                   sectors such as education, healthcare, hospi-
  investment products, are looking to compensate          tality, retail, housekeeping services, entertain-
  for this through PB.                                    ment, film production, animation and gaming,
                                                          logistics, pharmaceuticals, etc. The funds look
Growth of Alternative Investment                          to exit such investments either on listing or
Options                                                   through stake sale to another PE/VC firm. In
                                                          India, PE funds currently require a minimum
Alternative investments generally refer to invest-
                                                          investment of Rs25 lakhs, to be paid over two
ments in private equity (PE), real estate funds,
                                                          to three years. The returns are paid out once
REITs and venture capital (VC). At a broader level,
                                                          the fund exits a particular business or at the
they could include investments in tangible assets
                                                          end of the tenure of the fund, which could be
such as art, wine, antiques, coins, stamps, vintage
                                                          five to seven years. The fund usually charges a
cars and film production.
                                                          fund management fee, in addition to a standard
After the financial crisis of 2008, investors in          pre-decided profit-sharing arrangement with
India, especially HNI investors, were looking to          the investor.
diversify their holdings, and alternative invest-
                                                      •	 Real    estate funds: These funds allow HNI
ments emerged as an option. They became                   investors to invest in real estate in different
available to a broader class of investors in the          parts of the country. Funds collected from
form of formal, structured products that were             investors are used to fund a special purpose
managed by professional fund managers and                 vehicle (SPV) which in turn is used to fund real
regulated by an independent regulator.                    estate projects. Like PE funds, real estate funds
                                                          too require investors to contribute a minimum
The growth of alternative investments in India
                                                          of Rs25 lakhs over two to three years while
also coincided with the growth of private banking.
                                                          returns are paid out once the fund liquidates
Recommending alternative investments and
                                                          its stake in a project/SPV or at the end of the
other similar financial products needed a level
                                                          tenure of the fund, which could be five to seven
of expertise that the relationship managers in
                                                          years. In certain cases, the SPV thus created
Indian banks did not possess. This contributed to


                       cognizant 20-20 insights       3
issues bonds/NCDs that bear a fixed interest. In    The most popular form of alternative invest-
                such cases, investors are also entitled to these    ments in India have been private equity and real
                regular payments. Investors in India are also       estate funds. Here, it is important to differentiate
                familiar with the concept of REITs. However,        between PE and VC as far as the Indian scenario
                the regulator has not allowed REITs to operate      is concerned.
                in India.
                                                                    Typically in a VC, funds flow into high-poten-
              •	 Bullion Funds: These invest in gold, silver and    tial, high-risk, high-growth start-up companies.
                other precious metals. Such funds were floated      Private equity entails investment in unlisted,
                to take advantage of the fluctuations in bullion    small and mid-size businesses that have a well-
                prices. They allow investors to take physical       defined, tried and tested business model and a
                delivery of metals at the time of maturity.         steady revenue stream. These firms are typically
              •	 Art Funds: In the Indian context, an art fund is   looking for management and strategic expertise,
            like a mutual fund where instead of investing in        usually to assist them in listing at a later stage.
            stocks and other securities, the fund manager           This expertise is provided by PE players. In both
            buys works of art to be sold at a later date. Art       PE and VC, listing on the stock exchange is more
            funds came into vogue in India in 2008 and col-         often than not the primary objective and also the
            lectively were able to mop up ~Rs300 crores.            primary exit strategy for the fund providers — the
                             They were floated by Osian’s,          other being stake sale to another PE/VC firm.
    These firms are Edelweiss, Religare and Kotak,
                                                                    Emergence of Private Banking
typically looking for among a few others. Apart
                             from the timing — i.e., during         Services in India: The Role of Banks
  management and the financial crisis — another                     An important factor in the emergence of private
strategic expertise, reason for the success of                      banking is banks’ promotion of private banking
    usually to assist such funds was that Indian                    products and services, and their distribution of
                             artists had started making             TPPs.
 them in listing at a waves at global auctions. The
         later stage. average investor or even the                  Banks are always on the lookout for unexplored
                             HNI/UHNWI who was clueless             or partially explored sources of business and
            about art, got an opportunity to invest in art          revenue. Most banks are currently exploring
            through art funds. Unfortunately, the perfor-           the distribution of TPPs. Any product that is
            mance and track record of art funds in India            not developed by the bank, but which the bank
            has not been as expected.1                              recommends to its clients, is a TPP. Thus, TPPs




                   Quick Take
              Private Equity in India

              •	 Over the past six years, PE investments in India   •	 The number of exits showed a decline of 30%,
                have reached about U.S. $50 billion — a signifi-        with only 88 investments exited. Since exits are
                cant proportion of the total investment in India        usually by way of a listing, the existing stock
                during the period.                                      market conditions contributed to this.

              •	 From the seventh spot in 2004, India moved to      •	 In  2011, total deal value in the real estate
                the top spot in 2007 of the largest PE markets          sector rose almost 50%, from U.S.$1.5 billion
                in the APAC region (excluding Australia).               to U.S.$3.4 billion, while manufacturing and IT/
                                                                        ITES pulled in about U.S.$4 billion.
              •	 India was the fastest growing PE market in Asia
                in 2011, with investments of U.S.$14.3 billion,
                which translates to an approximately 55%
                increase over 2010.


              Source: IVCA Bain India Private Equity Report 2011 and 2012.


                                     cognizant 20-20 insights       4
Top 10 PE Investors in India (2005-2010)

                                            Number of                                 Number of           Value
              PE Investor                                           Investee
                                              Deals                                  PE Investors         ($Mn)
 Sequoia Capital India                          57            Bharti Airtel          4                  3166
 International Finance Corporation              53            GMR Infrastructure     8                  1152
 Bennett Coleman & Co Ltd                       52            DLF Ltd                3                  1050
 Citigroup Venture Capital                      39            Idea Cellular          8                  951

 ICICI Ventures                                 32            HDFC                   2                  767

 IDFC Private Equity                            31            NSE                    6                  697

 Goldman Sachs Investment Partners              27            Lodha Group            5                  680

 IL&FS Investment Managers Ltd                  23            Nitesh Estates         6                  621

 IL&FS Investment Managers Ltd                  22            Moser Baer India       4                  528

 Reliance Capital                               22            GVK Energy             3                  404

Source: Grant Thornton-IVCA-“The Fourth Wheel”-Private Equity in the Indian Corporate Landscape.
Figure 2



can include mutual funds, insurance, alternative              up, the revenue gap will be filled by TPPs distribu-
investment options, bullion and real estate. Rec-             tion and private banking operations.
ommending and distributing TPPs earns revenue
for the bank. This revenue could be by way of                 Impact of Private Banking
brokerage, commission and fees (upfront and                   Across the world, private banking contributes
trail). Over the past few years, revenue received             significantly to the total revenue earned by
from distributing TPPs has contributed signifi-               banks. Deutsche Bank PB contributes more than
cantly to banks’ bottom lines.                                €10 bn to the total revenue of €28.9 bn while the
                                                              figures stand at €699 mn against total revenue
This is illustrated by a comparison of the top                of €2.7 bn for Société Générale There is no
three private sector banks in India, as shown in              reason why this should not be so in the Indian
Figure 4.                                                     scenario too.
In the near future, it is very likely that as the tra-        Growth in the PB industry in India will spell change
ditional sources of revenue for banks start to dry            for all the parties involved:


Real Estate Funds Operating in India and Sourcing Funds from
Indian Investors

                  PE Fund                              A Sample Of Investments Done to Date
  Indiareit - Domestic Fund I, II and III      23 deals across Mumbai, Bangalore, Chennai, Hyderabad, NCR and
                                               Pune, involving residential and commercial properties.

  HDFC REP (Real Estate PMS)                   Runwal Projects, Ansal Group, Kalpataru.

  Aditya Birla Real Estate Fund

  Kotak Realty                                 Peepul Tree properties.

  ICICI Ventures-India Advantage Fund          Funding provided to Corolla Realty Pvt Ltd, Express Towers, Kolte
  Real Estate Sr1 and 2                        Patil Projects, Lodha Realty.

  Milestone


Source: Individual websites of the respective real estate funds.
Figure 3



                           cognizant 20-20 insights           5
Noninterest & Fee-Based Income of India’s Top Three Private Sector Banks

             ICIC Bank                                                                     Axis Bank
               Noninterest income                 Fee-based income                          Noninterest Income                   Fee based Income
                     (Rs Cr)                           (Rs Cr)                                    (Rs Cr)                             (Rs Cr)
                    8811                                                                                                                                   3357
             6928          7603 7478                                                                                   4632
                                         6648             6627 6524             6419                            3945                                2565
                                                 5012                    5650                                                                2173
                                                                                                         2896
                                                                                                  1795                                1320
                                                                                           1010                                778

             2007

                    2008

                           2009

                                  2010

                                         2011




                                                  2007

                                                           2008

                                                                  2009

                                                                         2010

                                                                                2011




                                                                                           2007

                                                                                                  2008

                                                                                                         2009

                                                                                                                2010

                                                                                                                       2011



                                                                                                                               2007

                                                                                                                                      2008

                                                                                                                                             2009

                                                                                                                                                    2010

                                                                                                                                                           2011
              CAGR                                                                          CAGR
              Noninterest Income: -1.03%        Fee Based Income: 6.38%                     Noninterest Income: 46.34%        Fee Based Income: 44.13%


            Source: www.icicibank.com                                                    Source: www.axisbank.com


            HDFC Bank
              Noninterest Income                         Fee-based income
                    (Rs Cr)                                   (Rs Cr)
                                                                                3597
                                                                         3006
                                  3983 4335                       2457
                           3291
                    2283                                   1715
                                                  1292
             1516
                                                                                       Noninterest income = Fee-based income + other income.
                                                                                       Fee income is income earned through commission,
                                                                                       exchange and brokerage.
             2007

                    2008

                           2009

                                  2010

                                         2011




                                                  2007

                                                           2008

                                                                  2009

                                                                         2010

                                                                                2011


              CAGR
              Noninterest Income: 30.03%        Fee Based Income: 29.16%

            Source: www.hdfcbank.com




Source: ICICI Bank: www.icicibank.com, HDFC Bank: www.hdfcbank.com, Axis Bank: www.axisbank.com
Figure 4



For Banks/Industry                                                                     •	 Availability  of services such as estate and
                                                                                           legacy planning, philanthropy, trust formation,
•	 A major source of revenue to replace/shore up                                           inheritance planning, etc. that were earlier
  depleting traditional sources of revenue.
                                                                                           carried out by the unorganized sector.
•	 An addition to banks’ product lines.
                                                                                       •	 More tax-efficient solutions by way of offshore
•	 Support for attracting and retaining clients.                                           banking and offshore accounts and also the
•	 Transforming banks into organizations that                                              opportunity to invest outside India.
  offer end-to-end financial solutions.
                                                                                       Challenges Faced by Stakeholders in
•	 Allowing Indian banks to move towards a more                                        the PB Business in India
  global model.
                                                                                       Banks
•	 Improve the quality of the workforce in banking
  given the specialized skillsets required from                                        •	 Infrastructure challenges: Lack of appropri-
  private bankers.                                                                         ate and adequate physical and IT infrastruc-
                                                                                           ture is one of the major challenges facing the
•	 More updated and relevant regulations to                                                PB sector in India. Bank branches are not well
  handle the dynamic nature of the private                                                 equipped to cater to HNIs and UHNWIs who
  banking industry.                                                                        avail themselves of PB services. Wealth man-
                                                                                           agement systems currently in use are basic
For Investors/Clients
                                                                                           in nature and are used more as instruments
•	 Availability of specialized services to cater to                                        for generating reports rather than for wealth
  the financial planning/wealth management                                                 management and financial planning.
  function.
                                                                                       •	 HR challenges: Shortage of experienced and
•	 A more professional approach to wealth                                                  trained private bankers and high attrition lev-
  management with infrastructure, people and                                               els means that talent is always in short supply.
  products, well equipped to handle HNIs and
  UHNWIs.                                                                              •	 Perception challenges: In the Indian context,
                                                                                           banks and FAs/RMs are viewed as product sell-
•	 Opportunity to invest in previously unexplored                                          ers and product-pushers rather than genuine
  instruments and sectors of the economy.                                                  financial planners or portfolio managers.


                                  cognizant 20-20 insights                             6
•	 Regulatory    challenges: Regulators in India         products that they recommend are also quite
  are not yet fully equipped to deal with the kind       high. In India, a portfolio manager may charge
  of products and services that private bank-            anything from 2% to 4% annually for fund
  ing offers. Quite a few products currently be-         management. The expense ratio for a mutual
  ing sold/recommended under private banking             fund may range from 1.5% to 2.5%, while the
  viz. PE, real estate funds, art funds and struc-       entry and exit costs for various products such
  tured products are being governed by diverse           as mutual funds, PE funds, structured products
  regulations such as the SEBI Venture Capital           and PMS can range from 2% to 5%. For the
  Funds Act (for PE) and Collective Investment           Indian investor, paying for advice is still an alien
  Scheme-CIS (for art funds). Alternative invest-        concept and a majority of investors prefer not
  ments are currently not regulated by a dedi-           paying.
  cated regulator, making it difficult for griev-
  ances to be redressed by banks (as brokers/
                                                     •	 Lack    of financial market activism: Unlike
                                                         countries in the West where activist investors
  distributors) or by investors.                         and shareholders have the leverage to force
•	 Challenges of scale: Not all Indian banks have        financial institutions and corporate entities to
  been able to scale up their private banking            reconsider decisions that may impact the retail
  operations, either due to lack of an adequate          investor adversely, investors in India are not
  number of clients or lack of adequate assets           organized enough.
  under management (AUM).
                                                     Regulators
Clients
                                                     •	 Dynamic nature of PB industry: Regulators
•	 Lack of adequate infrastructure.                      and regulations have not been able to keep
•	 Lack of trained private bankers.                      pace with the changes in the Indian PB
                                                         industry. For example, private equity funds
•	 Trust deficit: relationship managers    from
                                                         and real estate PMS are still regulated by SEBI
  banks and brokerage houses have not helped
                                                         under the Venture Capital Funds Act, when in
  their cause by trying to hard-sell products to
                                                         fact these alternative investments require a
  their clients. The focus has been on maximiz-
                                                         new set of regulations and people trained and
  ing sales rather than maximizing safety and
                                                         equipped to regulate them.
  returns for clients.

•	 Inadequate regulations.                           •	 Constant innovations in products and
                                                         services.
•	 High attrition rate among portfolio managers/     •	 Lack of qualified manpower.
  client relationship managers.

•	 Alternative   investment portfolio manag-         •	 More reliant on self-regulation.
  ers (local brokers and IFAs): Brokers and          •	 Conflict between regulators due to undefined
  independent financial advisors (IFAs) cater to         scope (viz. SEBI and IRDA).
  a sizable segment of the investor population.      •	 Lack of adequate political will to regulate
  Investors are attracted to them for multiple           financial markets.
  reasons: low cost of transactions, personalized
  service and advice, sharing of revenue by the      Financial Market Constituents (Including AMCs,
  broker/IFA, continuity of advisor as compared      Insurance Companies, PE Funds, VC Funds,
  to an ever-changing bank RM, etc. In such cas-     Bullion Funds, etc.)
  es, investors tend to ignore certain important     •	 Vintage  regulations that are ill-equipped to
  factors viz. whether the advisor is adequately         meet current market realities.
  qualified, whether he has adequate and rel-
  evant experience and whether he is acting in
                                                     •	 Ad   hoc changes in regulations without any
                                                         effort to understand their long-term impact on
  the best interests of the investor. The large          business.
  number of brokers/IFAs has made the portfolio
  management business highly segmented and           •	 Changes  in regulations to favor one sector
  restricted the growth of the business.                 over another (e.g., insurance over mutual
                                                         funds).
•	 High cost of portfolio management and
  fund management: Services of a private bank        •	 Changes in taxation.
  and a portfolio manager come at a high cost        •	 Skewed commission structure, which makes
  for the investor. In addition to portfolio/fund        banks/IFAs recommend products based on
  management fees, entry and exit fees for the           revenue and not based on the client’s needs.


                      cognizant 20-20 insights       7
•	 High  operational costs (including commis-            — viz. the bank (as broker/distributor) and the
  sions and other payouts).                              AMC/insurance company/PE fund. The client or
                                                         the investor is at a disadvantage as charges are
•	 Attrition among fund managers and portfolio           collected up front without any visibility into the
  managers.
                                                         performance of the fund. As is the practice in
However, these challenges can be surmounted.             the more developed private banking markets,
                                                         this segment needs portfolio management
•	 Improve infrastructure: Bank branches need            fees that depend on assets under management
  to have special areas for meeting PB customers.
                                                         and are also performance-based. Apart from
  These areas need to convey the importance
                                                         being an indicator of the effectiveness of the
  that the bank attaches to such customers. The
                                                         portfolio manager, such a revenue structure is
  designated PB areas or lounges should be an
                                                         fair to the investor as well.
  “experience” and not just another part of the
  branch. If possible (and this has been tried in    •	 Banks’ focus should be on building up AUM
  India by a few banks), there can be separate           rather than on short-term sales: A large AUM
  branches for PB customers. IT-related infra-           has a number of advantages — larger wallet
  structure is equally important. This includes          share of the client, greater flexibility while
  a world-class wealth management system                 planning finances of the client, lower possibil-
  that caters to every conceivable investment            ity of the client changing his banker, consistent
  product available in the market, a robust              revenue rather than a one-time payout, etc.
  reporting system that caters to the three main         AUM buildup rather than a one-time product
  components in a PB set-up (viz. client, FA/RM          sale also has the potential to create greater
  and management), a comprehensive front-/               trust as the investor sees the effort to plan
  middle-office system for FA/RM, a user-friend-         finances rather than just sell a product.
  ly client interfacing system through which         •	 Greater    control on how insurance is sold:
  the client can perform basic order entry and           In India, insurance as a product possibly con-
  reporting functions and lastly a back-office           tributes the most to the TPP revenue earned
  system that supports all of the above.                 by most banks. The revenue structure and the
•	 Make   a clear distinction between retail             non-monetary rewards offered by insurance
  banking and private banking: Retail and                companies prompt FA/RM to recommend
  private banking involve two very different             insurance to every client.3
  sets of customers with different requirements      •	 Create  awareness of PB among HNIs and
  and expectations. It may not be advisable to           UHNWIs.
  combine both and offer standardized services
  to each.                                           •	 Give   due importance to creating and posi-
                                                         tioning a PB brand.
•	 Create regulations aimed specifically at PB
  and PB products and services: This is likely       •	 Enlarge the pool of private bankers and take
                                                         steps to minimize attrition.
  to change when SEBI proposes an omnibus
  alternative investment regulation that would
                                                     Role of Regulators in Private Banking
  cover PE, VC, PIPE, strategy funds, social
                                                     in India
  sector funds, real estate funds, infrastruc-
  ture equity funds, etc. The objective is to help   Due to its nature, PB in India has to deal with
  fledgling firms and eliminate systematic risks     multiple regulators whose policies influence the
  for HNIs’ investments in privately managed         working of the sector at different levels. Thus,
  funds. A draft Alternative Investment Fund         apart from the Reserve Bank of India (RBI) and
  (AIF) regulation has been put up by SEBI on its    Securities and Exchange Board of India (SEBI),
  website for public feedback.2                      private banking products and services are also
                                                     influenced by the Forwards Markets Commission
•	 Change   the revenue structure: Banks and         (FMC) and the Insurance Regulatory and Develop-
  other financial institutions in India earn         ment Authority (IRDA). All products recommend-
  revenue from the sale and distribution of          ed and sold by private banks in India come within
  TPPs by way of brokerage, commission and           the purview of one or more of these entities.
  fees. In most cases, revenue is immediate and
  upfront — i.e., revenue is booked and received     The evolution of the financial products market
  at the time of sale. This revenue structure is     in India and the emergence of mature investors
  beneficial to two of the three parties involved    has meant that newer and more complex financial


                      cognizant 20-20 insights       8
products are being offered to investors. Many of                         a world-class IT infrastructure to support PB
these products do not fall into the broad classi-                        products and services. Thus, the private banking/
fication of debt and equity or investments and                           wealth management solutions used by most
insurance. These are effectively hybrid products                         Indian banks are woefully short on functionality
that bear the characteristics of multiple asset                          as compared to solutions used by banks in the
classes. The emergence of such products should                           developed PB markets.
have prompted the formation of a regulator that
was equipped to regulate them. There was also                            A comparative analysis of the top three Indian
a need to define the scope of each regulator in                          private sector banks with foreign banks that have
terms of who would regulate what. This ambiguity,                        similar numbers in terms of revenue and fee
in the recent past, has resulted in conflicts                            income throws up some results which should not
between regulators, which is never a good sign                           be ignored. The foreign banks in question — i.e.,
for the sectors that they regulate.4                                     Societe Generale, Macquarie and Deutsche Bank
                                                                         — use WealthManager, Triple A Plus and Temenos
Steps to Ensure Better Regulation                                        T24, respectively.
•	 Define scope of activity and jurisdiction of each                      The above analysis indicates:
  regulator.

•	 Have a separate regulator and regulations                             •	 Large    Indian banks and financial institutions
  for exotic investment products. People who                                  that offer private wealth management services
                                                                              generate revenues that are comparable with
  understand the intricacies of such products
                                                                              some foreign banks that have implemented
  should be a part of this process.
                                                                              T24/WM/TA-Plus for their PWM operations.
•	 Regulators need to focus on development of
  the sector/industry and not on the interests                           •	 For     foreign banks, a large percentage of
                                                                              revenues come from their PWM operations.
  of the components of the industry — viz. AMCs
                                                                              Large established banks like DB generate
  and insurance companies.
                                                                              up to 37% of total revenues from their PWM
•	 Ensure that the interests of the retail investor                           operations. For Indian financial institutions, the
  are protected and that a functioning grievance                              total fee-based income forms a substantial part
  redressing system is in place.                                              of total revenues but specific data from PWM
                                                                              operations is not available.
Lack of Adequate IT Infrastructure
Since the contribution from PB services to the                           •	 Indian    banks have recorded phenomenal
                                                                              growth over the past five years despite the
revenue of most banks in India is miniscule, banks
                                                                              global economic crisis. Thus, Indian banks that
have not given much importance to developing


Relationship Between Total & Fee Income for Indian & Foreign Banks

          Comparison of total income and fee income for                           Comparison of fee income as a % of total income and
                    Indian and foreign banks                                              CAGR for Indian and foreign banks
                          2010 - Total Income (Rs Cr)                                2010 – Fee Income as Percentage of Total Income
             Kotak    2487                                                               Kotak                       0.12
               Axis     8950                                                                Axis                                            0.29
             HDFC        12370                                                            HDFC                                      0.24
              ICICI        15592                                                           ICICI                                                   0.36
         Schroders     7928                                                          Schroders                0.08
  Société Générale          17862                                              Société Générale                                      0.25
         Macquarie                          53949                                    Macquarie                                          0.27
          Deutsche                                                   188195           Deutsche                                                      0.37


                         2010 – Fee Income (Rs Cr)                                                            Total Income CAGR
            Kotak     306                                                                Kotak                              32.35
               Axis     2565                                                                Axis                                    45.79
             HDFC       3006                                                              HDFC                              31.44
              ICICI         5650                                                           ICICI       5.67
        Schroders     653                                                            Schroders       2.589
  Société Générale        4544                                                 Societe Generale    -3.698
        Macquarie                   14467                                            Macquarie      0.832
         Deutsche                                            65280                    Deutsche     0.381




Figure 5




                                       cognizant 20-20 insights           9
WealthManager Features                                  Triple A Plus Features
    •	 Client Management                                    •	 Portfolio Management & Analysis
    •	 Portfolio Management                                 •	 Portfolio Rebalancing
    •	 Performance Management                               •	 Client Portal
    •	 Performance Analytics                                •	 Task & Interaction Management
    •	 Investment Policy                                    •	 Client Data Management and
                                                               Account Opening
    •	 Proposal Generation
    •	 Order Management                                     •	 Client & Portfolio Monitoring
    •	 Sales & Advice                                       •	 Proposal Generator
    •	 Client Reporting                                     •	 Portfolio Risk
    •	 Client portal                                        •	 Advanced Performance Analysis



  offer PWM services are growing faster than the       in-class PWM solution and how it would address
  foreign banks that have already implemented          their respective needs.
  T24/WM/TA-Plus for their PWM operations.
                                                       PWM products — viz. WealthManager and Triple A
Indian banks offering PWM services currently use       Plus — are of more utility to an RM or a portfolio
solutions with the bare minimum in functional-         manager as they address front-/mid-office
ity. Even today, the RM or portfolio manager in        functionalities. The private banking module of
a typical Indian PWM setup relies on multiple          Temenos T24 has more utility as a mid-/back-
systems and manual calculations while designing        office application.
and offering solutions to clients. The current
systems and solutions have limitations such as:        At present, penetration of Temenos/Avaloq-like
                                                       solutions in India is restricted to the odd imple-
•	 Limited functionalities in CRM, client profiling,   mentation in the micro-finance sector. None of
  portfolio generation and management, order           the major banks use global products for PWM. The
  and trade management and client and internal         current market for such solutions is dominated by
  reporting.                                           local players or by solutions developed “in house”
                                                       by some of the major financial institutions.
•	 No clear distinction between front- and back-
  office functionalities.                              The market here is extremely cost sensitive. Even
•	 Limited asset classes/products being captured.      though Indian PWM service providers have the
                                                       kind of volume, growth and revenues to justify
•	 Lack of consolidated reporting across asset         implementation of world-class solutions, very few
  classes.
                                                       have actually gone ahead and done it. Ignorance
•	 Errors in real-time updating of portfolio           and low expectations from investors and internal
  balances.                                            user groups — viz. RMs and portfolio managers —
•	 Errors in reporting of corporate action             has meant that organizations accord low priority
  processing.                                          to developing related infrastructure. This also
                                                       means that a structured, well-thought-out and
•	 Errors in capturing bank account balances           aggressive approach by product vendors and IT
  linked to the portfolio.
                                                       consulting firms can help in the creation of a new
On the other hand, clients too have not had            market for PWM solutions in India.
much exposure to world-class PWM solutions
                                                       Product vendors and their partner consulting
and hence are generally unaware of how a good
                                                       firms in India will need to move out of their
PWM system can help in financial planning and
                                                       comfort zone of selling and up-selling to existing
portfolio management. Clients and even the RMs
                                                       foreign clients and start focusing on Indian clients.
and portfolio managers are unaware of the kind
of reports that can be generated from a best-



                       cognizant 20-20 insights        10
References
•	 www.icicibank.com                                         •	 www.tvscapital.in
•	 www.hdfcbank.com                                          •	 www.privateequityfund.kotak.com
•	 www.kotak.com                                             •	 www.indiareit.com
•	 www.axisbank.com                                          •	 www.realtyfund.kotak.com
•	 www.db.com                                                •	 www.hdfcfund.com
•	 www.schroders.com                                         •	 www.myinsuranceclub.com
•	 www.societegeneral.com                                    •	 www.wikipedia.org
•	 www.macquarie.com                                         •	 www.investopedia.com
•	 www.temenos.com                                           •	 Top of the Pyramid T.O.P. India — Decoding the
                                                                  Ultra HNI-2011, Kotak Wealth-Crisil Research.
•	 www.livemint.com
•	 www.iciciventure.com                                      •	 Grant Thornton-Global Private
                                                                  Equity Report, 2011.
•	 www.idfc.com
•	 www.ilfsindia.com                                         •	 IVCA Bain India Private Equity Report,
                                                                  2011 and 2012.
•	 www.reliancecapital.co.in
•	 www.adityabirla-pe.com                                    •	 Grant Thornton-IVCA, The Fourth Wheel,”
                                                                  Private Equity in the Indian Corporate
•	 www.milestonecapital.in                                        Landscape.




Footnotes
1	
     http://www.livemint.com/2009/12/10003710/Osian8217s-art-fund-fails-i.html
2	
     http://www.livemint.com/2011/08/01190105/Sebi-plans-to-regulate-all-alt.html
3	
     http://www.business-standard.com/india/news/irda-slaps-rs-147-cr-finehdfc-life-for-norm-violation/478870/
     http://www.moneylife.in/article/irdas-record-penalties-on-hdfc-life-icici-pru-life-signal-a-change/26665.html
     http://www.business-standard.com/india/news/rs-118-cr-fineicici-pru-for-breachagent-fee-norms/475974/
4	
     http://www.moneycontrol.com/news/cnbc-tv18-comments/sebi-vs-irda-on-whose-turf-do-ulips-
     fall_442799.html
     http://indiatoday.intoday.in/story/Turf+war+over+ULIPs:+IRDA+asks+cos+to+ignore+SEBI+ord
     er/1/92344.html
     http://www.hindu.com/biz/2010/04/19/stories/2010041952151600.htm
     http://www.dnaindia.com/money/report_sebi-bans-14-insurers-from-issuing-ulip-irda-questions_1369615




About the Authors
Rakesh Singh is a Consulting Manager with Cognizant Business Consulting. He has more than 12 years of
experience in leading business and IT consulting engagements, mainly in the private banking and capital
markets domains. He can be reached at Rakesh.Singh3@cognizant.com.

Nikhil Mehta is a Consultant with Cognizant Business Consulting. He has more than nine years of
experience in the banking and wealth management domain across retail and private banking. Nikhil has
worked on core banking and wealth management products including Finacle, Finware, Temenos T24 and
Triple A Plus. He can be reached at Nikhil.Mehta@cognizant.com.




                           cognizant 20-20 insights          11
About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
delivery centers worldwide and approximately 145,200 employees as of June 30, 2012, Cognizant is a member of the
NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing
and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.


                                         World Headquarters                  European Headquarters                 India Operations Headquarters
                                         500 Frank W. Burr Blvd.             1 Kingdom Street                      #5/535, Old Mahabalipuram Road
                                         Teaneck, NJ 07666 USA               Paddington Central                    Okkiyam Pettai, Thoraipakkam
                                         Phone: +1 201 801 0233              London W2 6BD                         Chennai, 600 096 India
                                         Fax: +1 201 801 0243                Phone: +44 (0) 20 7297 7600           Phone: +91 (0) 44 4209 6000
                                         Toll Free: +1 888 937 3277          Fax: +44 (0) 20 7121 0102             Fax: +91 (0) 44 4209 6060
                                         Email: inquiry@cognizant.com        Email: infouk@cognizant.com           Email: inquiryindia@cognizant.com


©
­­ Copyright 2012, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is
subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

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Private Banking in India After the 2008 Financial Crisis

  • 1. • Cognizant 20-20 Insights Private Banking in India After the 2008 Financial Crisis The expansion of private banking in India continues in tandem with the country’s growing wealth. However, the industry continues to be hamstrung by regulatory and technological factors. Executive Summary This paper takes a look at the PB business in terms of: Until 2008, private banking (PB) existed in India largely as an investment advisory service offered • The role of banks and customers/investors in by a few banks. PB services were offered as part bringing about a change in the way PB business of the overall banking services package. They is conducted in India. were rarely rendered by trained resources. The products were also limited to traditional offerings • The importance of PB and distribution of third- party products (TPPs) as revenue sources in such as deposits, mutual funds, insurance and an era of decline in the traditional sources of bonds. After the 2008 financial crisis, a number revenue. of changes occurred: • The drawbacks in the way the business is being • Though India remained largely insulated conducted in India and the consequent impact from the crisis in the financial markets, on stakeholders. the widespread media coverage increased investors’ awareness of the products and • The steps required to ensure that the Indian PB industry meets global standards in terms of services available globally. infrastructure, human capital, mindset, etc. • Investors began considering alternative forms • The role of regulators and whether they are of investments such as private equity, REITs, equipped to handle the demands of the PB structured products, currencies, commodities, business. bonds, etc. • Scope for consulting firms in the develop- • This new breed of investors began demanding ment of IT infrastructure for banks and other more from their banks and from their private financial institutions. bankers in terms of services, products, returns, reports, information, etc. Rise of Alternative Investment • Indian banks and financial institutions Opportunities responded by beginning to provide PB services A positive effect of the financial crisis of 2008 that were more in tune with global offerings. was that it familiarized Indian investors with cognizant 20-20 insights | november 2012
  • 2. words such as sub-prime, securitization, collateral Private Banking in India debt obligations (CDOs), mortgage-backed The economic reforms launched in 1991, the securities (MBS), etc. Investors came across subsequent high growth rates in the information several investment products that were common technology enabled services (ITES) and manufac- in developed markets in the West. Products such turing sectors, the opening up of capital markets as private equity, real estate investment trusts and the corresponding rise in income levels con- (REITs), junk bonds, etc., which had hitherto tributed to the emergence of specialized banking been the preserve of a select group of investors, and investment services in India. became known to the broader class of investor. Some relevant statistics outlined in a recent Investment products that provided the opportu- Kotak Wealth Management-Crisil research report: nity to invest in unlisted companies, real estate, art, gold, silver and other precious metals as well • There are an estimated 62,000 ultra-wealthy as in previously unexplored sectors such as enter- households in India (2010-11 E), which is likely tainment, retail, logistics, etc. provided the kind to grow to 219,000 by 2015-16. of diversification that investors sought. The fall in the stock markets and the failure of global banks • From three billionaires in 1996 to eight in 2004, to 55 in 2011, India currently comes third after and financial institutions had raised concerns the U.S. and China in terms of the number of about the solvency of such entities even in the billionaires. Indian scenario. • The total net worth of India’s ultra-HNW indi- In response, banks and other financial institutions viduals is expected to increase five-fold to began recommending such products to their high Rs235 trillion by 2015-16. net worth individual (HNI) clients. These products, apart from having a high investment threshold, • Ultra-HNIs invest up to one-fifth of their income for growing their wealth. also required trained and qualified bankers/advi- sors who could recommend, service and provide However, the most interesting statistic is given in information on such products. Banks therefore Figure 1: began offering investment advisory services to HNIs under the private banking umbrella. Projected Change in Investment Strategies for HNIs Ultra-HNIs investing strategy has been simple so far... ...but their investments in more complex asets are poised to rise. 2009-2010 E 2010-2011 E 2011-2012 P Alternative Assets 9.5% 9.3% 11.2% 37.4% 33.1% 20.4% 9.3% Real Estate Equity Debt Alternative Assets Debt 20.8% 20.4% 18.2% Equity 31.6% 33.1% 30.1% Real Estate 38.1% 37.4% 40.5% E: Estimated P: Projected Source: Top of the Pyramid T.O.P India-Decoding the Ultra HNI-2011—Kotak Wealth-Crisil Research. Figure 1 cognizant 20-20 insights 2
  • 3. According to this survey, the traditional avenues the rapid growth of private banking services in of investment viz. equity and debt are likely to the country. give way to real estate and alternative assets. In fact, investments in these two will record growth It is also possible that following the financial crisis at the expense of equity and debt, with alternative banks found it easier to convince investors to assets growing the most on a percentage basis. consider alternative investments. The regulatory changes in the Indian financial and investment Why is this likely to happen? sector (viz. abolition of entry load on mutual funds and subsequent cap on brokerage paid out • Rising income levels and surplus funds. to distributors) may also have prompted banks • Investors’ willingness to look beyond tradition- and other financial institutions to recommend al equity and debt instruments. alternative investments. (On the basis of upfront commission received, banks earn more from • Falling returns and increased risk perception alternative investments.) Lastly, amid falling associated with traditional equity products. revenues from other sources (NIMs, low credit • The perception that risk associated with alter- off-take, higher cost of deposits, etc.), private native assets and real estate can be controlled banking services and alternative investments and managed. were a newer source of revenue. • The emergence of previously unexplored Alternative Investment investment options — e.g., vintage cars, art and antiques, coins, wine, etc. Options in India • The emergence of previously unexplored • Private equity funds: These funds allow HNIs and UHNWIs to invest in unlisted companies. investment avenues such as private equity, real Such companies usually have a business estate, art funds, REITs, film production and model and a steady revenue stream. PE funds funds, etc. generally have a mandate to invest in every • The emergence of exotic debt instruments. sector except real estate. In India, these funds • Banks and financial advisors, hit by falling have been investing in relatively unexplored revenues from traditional banking and sectors such as education, healthcare, hospi- investment products, are looking to compensate tality, retail, housekeeping services, entertain- for this through PB. ment, film production, animation and gaming, logistics, pharmaceuticals, etc. The funds look Growth of Alternative Investment to exit such investments either on listing or Options through stake sale to another PE/VC firm. In India, PE funds currently require a minimum Alternative investments generally refer to invest- investment of Rs25 lakhs, to be paid over two ments in private equity (PE), real estate funds, to three years. The returns are paid out once REITs and venture capital (VC). At a broader level, the fund exits a particular business or at the they could include investments in tangible assets end of the tenure of the fund, which could be such as art, wine, antiques, coins, stamps, vintage five to seven years. The fund usually charges a cars and film production. fund management fee, in addition to a standard After the financial crisis of 2008, investors in pre-decided profit-sharing arrangement with India, especially HNI investors, were looking to the investor. diversify their holdings, and alternative invest- • Real estate funds: These funds allow HNI ments emerged as an option. They became investors to invest in real estate in different available to a broader class of investors in the parts of the country. Funds collected from form of formal, structured products that were investors are used to fund a special purpose managed by professional fund managers and vehicle (SPV) which in turn is used to fund real regulated by an independent regulator. estate projects. Like PE funds, real estate funds too require investors to contribute a minimum The growth of alternative investments in India of Rs25 lakhs over two to three years while also coincided with the growth of private banking. returns are paid out once the fund liquidates Recommending alternative investments and its stake in a project/SPV or at the end of the other similar financial products needed a level tenure of the fund, which could be five to seven of expertise that the relationship managers in years. In certain cases, the SPV thus created Indian banks did not possess. This contributed to cognizant 20-20 insights 3
  • 4. issues bonds/NCDs that bear a fixed interest. In The most popular form of alternative invest- such cases, investors are also entitled to these ments in India have been private equity and real regular payments. Investors in India are also estate funds. Here, it is important to differentiate familiar with the concept of REITs. However, between PE and VC as far as the Indian scenario the regulator has not allowed REITs to operate is concerned. in India. Typically in a VC, funds flow into high-poten- • Bullion Funds: These invest in gold, silver and tial, high-risk, high-growth start-up companies. other precious metals. Such funds were floated Private equity entails investment in unlisted, to take advantage of the fluctuations in bullion small and mid-size businesses that have a well- prices. They allow investors to take physical defined, tried and tested business model and a delivery of metals at the time of maturity. steady revenue stream. These firms are typically • Art Funds: In the Indian context, an art fund is looking for management and strategic expertise, like a mutual fund where instead of investing in usually to assist them in listing at a later stage. stocks and other securities, the fund manager This expertise is provided by PE players. In both buys works of art to be sold at a later date. Art PE and VC, listing on the stock exchange is more funds came into vogue in India in 2008 and col- often than not the primary objective and also the lectively were able to mop up ~Rs300 crores. primary exit strategy for the fund providers — the They were floated by Osian’s, other being stake sale to another PE/VC firm. These firms are Edelweiss, Religare and Kotak, Emergence of Private Banking typically looking for among a few others. Apart from the timing — i.e., during Services in India: The Role of Banks management and the financial crisis — another An important factor in the emergence of private strategic expertise, reason for the success of banking is banks’ promotion of private banking usually to assist such funds was that Indian products and services, and their distribution of artists had started making TPPs. them in listing at a waves at global auctions. The later stage. average investor or even the Banks are always on the lookout for unexplored HNI/UHNWI who was clueless or partially explored sources of business and about art, got an opportunity to invest in art revenue. Most banks are currently exploring through art funds. Unfortunately, the perfor- the distribution of TPPs. Any product that is mance and track record of art funds in India not developed by the bank, but which the bank has not been as expected.1 recommends to its clients, is a TPP. Thus, TPPs Quick Take Private Equity in India • Over the past six years, PE investments in India • The number of exits showed a decline of 30%, have reached about U.S. $50 billion — a signifi- with only 88 investments exited. Since exits are cant proportion of the total investment in India usually by way of a listing, the existing stock during the period. market conditions contributed to this. • From the seventh spot in 2004, India moved to • In 2011, total deal value in the real estate the top spot in 2007 of the largest PE markets sector rose almost 50%, from U.S.$1.5 billion in the APAC region (excluding Australia). to U.S.$3.4 billion, while manufacturing and IT/ ITES pulled in about U.S.$4 billion. • India was the fastest growing PE market in Asia in 2011, with investments of U.S.$14.3 billion, which translates to an approximately 55% increase over 2010. Source: IVCA Bain India Private Equity Report 2011 and 2012. cognizant 20-20 insights 4
  • 5. Top 10 PE Investors in India (2005-2010) Number of Number of Value PE Investor Investee Deals PE Investors ($Mn) Sequoia Capital India 57 Bharti Airtel 4 3166 International Finance Corporation 53 GMR Infrastructure 8 1152 Bennett Coleman & Co Ltd 52 DLF Ltd 3 1050 Citigroup Venture Capital 39 Idea Cellular 8 951 ICICI Ventures 32 HDFC 2 767 IDFC Private Equity 31 NSE 6 697 Goldman Sachs Investment Partners 27 Lodha Group 5 680 IL&FS Investment Managers Ltd 23 Nitesh Estates 6 621 IL&FS Investment Managers Ltd 22 Moser Baer India 4 528 Reliance Capital 22 GVK Energy 3 404 Source: Grant Thornton-IVCA-“The Fourth Wheel”-Private Equity in the Indian Corporate Landscape. Figure 2 can include mutual funds, insurance, alternative up, the revenue gap will be filled by TPPs distribu- investment options, bullion and real estate. Rec- tion and private banking operations. ommending and distributing TPPs earns revenue for the bank. This revenue could be by way of Impact of Private Banking brokerage, commission and fees (upfront and Across the world, private banking contributes trail). Over the past few years, revenue received significantly to the total revenue earned by from distributing TPPs has contributed signifi- banks. Deutsche Bank PB contributes more than cantly to banks’ bottom lines. €10 bn to the total revenue of €28.9 bn while the figures stand at €699 mn against total revenue This is illustrated by a comparison of the top of €2.7 bn for Société Générale There is no three private sector banks in India, as shown in reason why this should not be so in the Indian Figure 4. scenario too. In the near future, it is very likely that as the tra- Growth in the PB industry in India will spell change ditional sources of revenue for banks start to dry for all the parties involved: Real Estate Funds Operating in India and Sourcing Funds from Indian Investors PE Fund A Sample Of Investments Done to Date Indiareit - Domestic Fund I, II and III 23 deals across Mumbai, Bangalore, Chennai, Hyderabad, NCR and Pune, involving residential and commercial properties. HDFC REP (Real Estate PMS) Runwal Projects, Ansal Group, Kalpataru. Aditya Birla Real Estate Fund Kotak Realty Peepul Tree properties. ICICI Ventures-India Advantage Fund Funding provided to Corolla Realty Pvt Ltd, Express Towers, Kolte Real Estate Sr1 and 2 Patil Projects, Lodha Realty. Milestone Source: Individual websites of the respective real estate funds. Figure 3 cognizant 20-20 insights 5
  • 6. Noninterest & Fee-Based Income of India’s Top Three Private Sector Banks ICIC Bank Axis Bank Noninterest income Fee-based income Noninterest Income Fee based Income (Rs Cr) (Rs Cr) (Rs Cr) (Rs Cr) 8811 3357 6928 7603 7478 4632 6648 6627 6524 6419 3945 2565 5012 5650 2173 2896 1795 1320 1010 778 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 CAGR CAGR Noninterest Income: -1.03% Fee Based Income: 6.38% Noninterest Income: 46.34% Fee Based Income: 44.13% Source: www.icicibank.com Source: www.axisbank.com HDFC Bank Noninterest Income Fee-based income (Rs Cr) (Rs Cr) 3597 3006 3983 4335 2457 3291 2283 1715 1292 1516 Noninterest income = Fee-based income + other income. Fee income is income earned through commission, exchange and brokerage. 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 CAGR Noninterest Income: 30.03% Fee Based Income: 29.16% Source: www.hdfcbank.com Source: ICICI Bank: www.icicibank.com, HDFC Bank: www.hdfcbank.com, Axis Bank: www.axisbank.com Figure 4 For Banks/Industry • Availability of services such as estate and legacy planning, philanthropy, trust formation, • A major source of revenue to replace/shore up inheritance planning, etc. that were earlier depleting traditional sources of revenue. carried out by the unorganized sector. • An addition to banks’ product lines. • More tax-efficient solutions by way of offshore • Support for attracting and retaining clients. banking and offshore accounts and also the • Transforming banks into organizations that opportunity to invest outside India. offer end-to-end financial solutions. Challenges Faced by Stakeholders in • Allowing Indian banks to move towards a more the PB Business in India global model. Banks • Improve the quality of the workforce in banking given the specialized skillsets required from • Infrastructure challenges: Lack of appropri- private bankers. ate and adequate physical and IT infrastruc- ture is one of the major challenges facing the • More updated and relevant regulations to PB sector in India. Bank branches are not well handle the dynamic nature of the private equipped to cater to HNIs and UHNWIs who banking industry. avail themselves of PB services. Wealth man- agement systems currently in use are basic For Investors/Clients in nature and are used more as instruments • Availability of specialized services to cater to for generating reports rather than for wealth the financial planning/wealth management management and financial planning. function. • HR challenges: Shortage of experienced and • A more professional approach to wealth trained private bankers and high attrition lev- management with infrastructure, people and els means that talent is always in short supply. products, well equipped to handle HNIs and UHNWIs. • Perception challenges: In the Indian context, banks and FAs/RMs are viewed as product sell- • Opportunity to invest in previously unexplored ers and product-pushers rather than genuine instruments and sectors of the economy. financial planners or portfolio managers. cognizant 20-20 insights 6
  • 7. • Regulatory challenges: Regulators in India products that they recommend are also quite are not yet fully equipped to deal with the kind high. In India, a portfolio manager may charge of products and services that private bank- anything from 2% to 4% annually for fund ing offers. Quite a few products currently be- management. The expense ratio for a mutual ing sold/recommended under private banking fund may range from 1.5% to 2.5%, while the viz. PE, real estate funds, art funds and struc- entry and exit costs for various products such tured products are being governed by diverse as mutual funds, PE funds, structured products regulations such as the SEBI Venture Capital and PMS can range from 2% to 5%. For the Funds Act (for PE) and Collective Investment Indian investor, paying for advice is still an alien Scheme-CIS (for art funds). Alternative invest- concept and a majority of investors prefer not ments are currently not regulated by a dedi- paying. cated regulator, making it difficult for griev- ances to be redressed by banks (as brokers/ • Lack of financial market activism: Unlike countries in the West where activist investors distributors) or by investors. and shareholders have the leverage to force • Challenges of scale: Not all Indian banks have financial institutions and corporate entities to been able to scale up their private banking reconsider decisions that may impact the retail operations, either due to lack of an adequate investor adversely, investors in India are not number of clients or lack of adequate assets organized enough. under management (AUM). Regulators Clients • Dynamic nature of PB industry: Regulators • Lack of adequate infrastructure. and regulations have not been able to keep • Lack of trained private bankers. pace with the changes in the Indian PB industry. For example, private equity funds • Trust deficit: relationship managers from and real estate PMS are still regulated by SEBI banks and brokerage houses have not helped under the Venture Capital Funds Act, when in their cause by trying to hard-sell products to fact these alternative investments require a their clients. The focus has been on maximiz- new set of regulations and people trained and ing sales rather than maximizing safety and equipped to regulate them. returns for clients. • Inadequate regulations. • Constant innovations in products and services. • High attrition rate among portfolio managers/ • Lack of qualified manpower. client relationship managers. • Alternative investment portfolio manag- • More reliant on self-regulation. ers (local brokers and IFAs): Brokers and • Conflict between regulators due to undefined independent financial advisors (IFAs) cater to scope (viz. SEBI and IRDA). a sizable segment of the investor population. • Lack of adequate political will to regulate Investors are attracted to them for multiple financial markets. reasons: low cost of transactions, personalized service and advice, sharing of revenue by the Financial Market Constituents (Including AMCs, broker/IFA, continuity of advisor as compared Insurance Companies, PE Funds, VC Funds, to an ever-changing bank RM, etc. In such cas- Bullion Funds, etc.) es, investors tend to ignore certain important • Vintage regulations that are ill-equipped to factors viz. whether the advisor is adequately meet current market realities. qualified, whether he has adequate and rel- evant experience and whether he is acting in • Ad hoc changes in regulations without any effort to understand their long-term impact on the best interests of the investor. The large business. number of brokers/IFAs has made the portfolio management business highly segmented and • Changes in regulations to favor one sector restricted the growth of the business. over another (e.g., insurance over mutual funds). • High cost of portfolio management and fund management: Services of a private bank • Changes in taxation. and a portfolio manager come at a high cost • Skewed commission structure, which makes for the investor. In addition to portfolio/fund banks/IFAs recommend products based on management fees, entry and exit fees for the revenue and not based on the client’s needs. cognizant 20-20 insights 7
  • 8. • High operational costs (including commis- — viz. the bank (as broker/distributor) and the sions and other payouts). AMC/insurance company/PE fund. The client or the investor is at a disadvantage as charges are • Attrition among fund managers and portfolio collected up front without any visibility into the managers. performance of the fund. As is the practice in However, these challenges can be surmounted. the more developed private banking markets, this segment needs portfolio management • Improve infrastructure: Bank branches need fees that depend on assets under management to have special areas for meeting PB customers. and are also performance-based. Apart from These areas need to convey the importance being an indicator of the effectiveness of the that the bank attaches to such customers. The portfolio manager, such a revenue structure is designated PB areas or lounges should be an fair to the investor as well. “experience” and not just another part of the branch. If possible (and this has been tried in • Banks’ focus should be on building up AUM India by a few banks), there can be separate rather than on short-term sales: A large AUM branches for PB customers. IT-related infra- has a number of advantages — larger wallet structure is equally important. This includes share of the client, greater flexibility while a world-class wealth management system planning finances of the client, lower possibil- that caters to every conceivable investment ity of the client changing his banker, consistent product available in the market, a robust revenue rather than a one-time payout, etc. reporting system that caters to the three main AUM buildup rather than a one-time product components in a PB set-up (viz. client, FA/RM sale also has the potential to create greater and management), a comprehensive front-/ trust as the investor sees the effort to plan middle-office system for FA/RM, a user-friend- finances rather than just sell a product. ly client interfacing system through which • Greater control on how insurance is sold: the client can perform basic order entry and In India, insurance as a product possibly con- reporting functions and lastly a back-office tributes the most to the TPP revenue earned system that supports all of the above. by most banks. The revenue structure and the • Make a clear distinction between retail non-monetary rewards offered by insurance banking and private banking: Retail and companies prompt FA/RM to recommend private banking involve two very different insurance to every client.3 sets of customers with different requirements • Create awareness of PB among HNIs and and expectations. It may not be advisable to UHNWIs. combine both and offer standardized services to each. • Give due importance to creating and posi- tioning a PB brand. • Create regulations aimed specifically at PB and PB products and services: This is likely • Enlarge the pool of private bankers and take steps to minimize attrition. to change when SEBI proposes an omnibus alternative investment regulation that would Role of Regulators in Private Banking cover PE, VC, PIPE, strategy funds, social in India sector funds, real estate funds, infrastruc- ture equity funds, etc. The objective is to help Due to its nature, PB in India has to deal with fledgling firms and eliminate systematic risks multiple regulators whose policies influence the for HNIs’ investments in privately managed working of the sector at different levels. Thus, funds. A draft Alternative Investment Fund apart from the Reserve Bank of India (RBI) and (AIF) regulation has been put up by SEBI on its Securities and Exchange Board of India (SEBI), website for public feedback.2 private banking products and services are also influenced by the Forwards Markets Commission • Change the revenue structure: Banks and (FMC) and the Insurance Regulatory and Develop- other financial institutions in India earn ment Authority (IRDA). All products recommend- revenue from the sale and distribution of ed and sold by private banks in India come within TPPs by way of brokerage, commission and the purview of one or more of these entities. fees. In most cases, revenue is immediate and upfront — i.e., revenue is booked and received The evolution of the financial products market at the time of sale. This revenue structure is in India and the emergence of mature investors beneficial to two of the three parties involved has meant that newer and more complex financial cognizant 20-20 insights 8
  • 9. products are being offered to investors. Many of a world-class IT infrastructure to support PB these products do not fall into the broad classi- products and services. Thus, the private banking/ fication of debt and equity or investments and wealth management solutions used by most insurance. These are effectively hybrid products Indian banks are woefully short on functionality that bear the characteristics of multiple asset as compared to solutions used by banks in the classes. The emergence of such products should developed PB markets. have prompted the formation of a regulator that was equipped to regulate them. There was also A comparative analysis of the top three Indian a need to define the scope of each regulator in private sector banks with foreign banks that have terms of who would regulate what. This ambiguity, similar numbers in terms of revenue and fee in the recent past, has resulted in conflicts income throws up some results which should not between regulators, which is never a good sign be ignored. The foreign banks in question — i.e., for the sectors that they regulate.4 Societe Generale, Macquarie and Deutsche Bank — use WealthManager, Triple A Plus and Temenos Steps to Ensure Better Regulation T24, respectively. • Define scope of activity and jurisdiction of each The above analysis indicates: regulator. • Have a separate regulator and regulations • Large Indian banks and financial institutions for exotic investment products. People who that offer private wealth management services generate revenues that are comparable with understand the intricacies of such products some foreign banks that have implemented should be a part of this process. T24/WM/TA-Plus for their PWM operations. • Regulators need to focus on development of the sector/industry and not on the interests • For foreign banks, a large percentage of revenues come from their PWM operations. of the components of the industry — viz. AMCs Large established banks like DB generate and insurance companies. up to 37% of total revenues from their PWM • Ensure that the interests of the retail investor operations. For Indian financial institutions, the are protected and that a functioning grievance total fee-based income forms a substantial part redressing system is in place. of total revenues but specific data from PWM operations is not available. Lack of Adequate IT Infrastructure Since the contribution from PB services to the • Indian banks have recorded phenomenal growth over the past five years despite the revenue of most banks in India is miniscule, banks global economic crisis. Thus, Indian banks that have not given much importance to developing Relationship Between Total & Fee Income for Indian & Foreign Banks Comparison of total income and fee income for Comparison of fee income as a % of total income and Indian and foreign banks CAGR for Indian and foreign banks 2010 - Total Income (Rs Cr) 2010 – Fee Income as Percentage of Total Income Kotak 2487 Kotak 0.12 Axis 8950 Axis 0.29 HDFC 12370 HDFC 0.24 ICICI 15592 ICICI 0.36 Schroders 7928 Schroders 0.08 Société Générale 17862 Société Générale 0.25 Macquarie 53949 Macquarie 0.27 Deutsche 188195 Deutsche 0.37 2010 – Fee Income (Rs Cr) Total Income CAGR Kotak 306 Kotak 32.35 Axis 2565 Axis 45.79 HDFC 3006 HDFC 31.44 ICICI 5650 ICICI 5.67 Schroders 653 Schroders 2.589 Société Générale 4544 Societe Generale -3.698 Macquarie 14467 Macquarie 0.832 Deutsche 65280 Deutsche 0.381 Figure 5 cognizant 20-20 insights 9
  • 10. WealthManager Features Triple A Plus Features • Client Management • Portfolio Management & Analysis • Portfolio Management • Portfolio Rebalancing • Performance Management • Client Portal • Performance Analytics • Task & Interaction Management • Investment Policy • Client Data Management and Account Opening • Proposal Generation • Order Management • Client & Portfolio Monitoring • Sales & Advice • Proposal Generator • Client Reporting • Portfolio Risk • Client portal • Advanced Performance Analysis offer PWM services are growing faster than the in-class PWM solution and how it would address foreign banks that have already implemented their respective needs. T24/WM/TA-Plus for their PWM operations. PWM products — viz. WealthManager and Triple A Indian banks offering PWM services currently use Plus — are of more utility to an RM or a portfolio solutions with the bare minimum in functional- manager as they address front-/mid-office ity. Even today, the RM or portfolio manager in functionalities. The private banking module of a typical Indian PWM setup relies on multiple Temenos T24 has more utility as a mid-/back- systems and manual calculations while designing office application. and offering solutions to clients. The current systems and solutions have limitations such as: At present, penetration of Temenos/Avaloq-like solutions in India is restricted to the odd imple- • Limited functionalities in CRM, client profiling, mentation in the micro-finance sector. None of portfolio generation and management, order the major banks use global products for PWM. The and trade management and client and internal current market for such solutions is dominated by reporting. local players or by solutions developed “in house” by some of the major financial institutions. • No clear distinction between front- and back- office functionalities. The market here is extremely cost sensitive. Even • Limited asset classes/products being captured. though Indian PWM service providers have the kind of volume, growth and revenues to justify • Lack of consolidated reporting across asset implementation of world-class solutions, very few classes. have actually gone ahead and done it. Ignorance • Errors in real-time updating of portfolio and low expectations from investors and internal balances. user groups — viz. RMs and portfolio managers — • Errors in reporting of corporate action has meant that organizations accord low priority processing. to developing related infrastructure. This also means that a structured, well-thought-out and • Errors in capturing bank account balances aggressive approach by product vendors and IT linked to the portfolio. consulting firms can help in the creation of a new On the other hand, clients too have not had market for PWM solutions in India. much exposure to world-class PWM solutions Product vendors and their partner consulting and hence are generally unaware of how a good firms in India will need to move out of their PWM system can help in financial planning and comfort zone of selling and up-selling to existing portfolio management. Clients and even the RMs foreign clients and start focusing on Indian clients. and portfolio managers are unaware of the kind of reports that can be generated from a best- cognizant 20-20 insights 10
  • 11. References • www.icicibank.com • www.tvscapital.in • www.hdfcbank.com • www.privateequityfund.kotak.com • www.kotak.com • www.indiareit.com • www.axisbank.com • www.realtyfund.kotak.com • www.db.com • www.hdfcfund.com • www.schroders.com • www.myinsuranceclub.com • www.societegeneral.com • www.wikipedia.org • www.macquarie.com • www.investopedia.com • www.temenos.com • Top of the Pyramid T.O.P. India — Decoding the Ultra HNI-2011, Kotak Wealth-Crisil Research. • www.livemint.com • www.iciciventure.com • Grant Thornton-Global Private Equity Report, 2011. • www.idfc.com • www.ilfsindia.com • IVCA Bain India Private Equity Report, 2011 and 2012. • www.reliancecapital.co.in • www.adityabirla-pe.com • Grant Thornton-IVCA, The Fourth Wheel,” Private Equity in the Indian Corporate • www.milestonecapital.in Landscape. Footnotes 1 http://www.livemint.com/2009/12/10003710/Osian8217s-art-fund-fails-i.html 2 http://www.livemint.com/2011/08/01190105/Sebi-plans-to-regulate-all-alt.html 3 http://www.business-standard.com/india/news/irda-slaps-rs-147-cr-finehdfc-life-for-norm-violation/478870/ http://www.moneylife.in/article/irdas-record-penalties-on-hdfc-life-icici-pru-life-signal-a-change/26665.html http://www.business-standard.com/india/news/rs-118-cr-fineicici-pru-for-breachagent-fee-norms/475974/ 4 http://www.moneycontrol.com/news/cnbc-tv18-comments/sebi-vs-irda-on-whose-turf-do-ulips- fall_442799.html http://indiatoday.intoday.in/story/Turf+war+over+ULIPs:+IRDA+asks+cos+to+ignore+SEBI+ord er/1/92344.html http://www.hindu.com/biz/2010/04/19/stories/2010041952151600.htm http://www.dnaindia.com/money/report_sebi-bans-14-insurers-from-issuing-ulip-irda-questions_1369615 About the Authors Rakesh Singh is a Consulting Manager with Cognizant Business Consulting. He has more than 12 years of experience in leading business and IT consulting engagements, mainly in the private banking and capital markets domains. He can be reached at Rakesh.Singh3@cognizant.com. Nikhil Mehta is a Consultant with Cognizant Business Consulting. He has more than nine years of experience in the banking and wealth management domain across retail and private banking. Nikhil has worked on core banking and wealth management products including Finacle, Finware, Temenos T24 and Triple A Plus. He can be reached at Nikhil.Mehta@cognizant.com. cognizant 20-20 insights 11
  • 12. About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out- sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 145,200 employees as of June 30, 2012, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. 1 Kingdom Street #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA Paddington Central Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London W2 6BD Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7297 7600 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7121 0102 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: infouk@cognizant.com Email: inquiryindia@cognizant.com © ­­ Copyright 2012, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.