Private banking (PB) services in India are expanding very rapidly in conjunction with a growth economy and many high et worth individuals seeking better returns on their investments through such PB offerings as REITs, third-party products, CDOs, mortgage-backed securuties, etc. We ofer a guide to investment options and options for IT infrastructure to enable banks to provide wide-ranging PB services.
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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