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Financial Market in India

Preprint · November 2021

DOI: 10.13140/RG.2.2.15939.12321

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Sonjai Kumar
Fortune Institute of International Business New Delhi India
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Financial Market in India
Sonjai Kumar, CMIRM, FRMAI, , SIRM, CRICP
Sonjai_kumar@hotmail.com
Disclaimer: The views expressed are mine and not necessarily of my employer.

Background
This above summit was organized in July 2018 in Mumbai. I got the opportunity to Chair the summit for
two days. The background of the summit was to discuss how to fulfill the customer’s needs in providing
financial solutions that meet their demand; to identify the areas of customer education to enable them
to make the right choice for their financial needs; how to innovate products and services making it
useful for customers and what are the emerging trends in technology that can be leveraged to enhance
the marketing and distribution.

There is a changing landscape of Indian customers where their jobs are no longer secured, the spending
pattern of the younger generation have taken a turn towards more spending and fewer savings side,
there is an emerging trend about change in lifestyle with more emergence of diabetes and hypertension
at an early age; the retirement benefits are to be self-funded. Such changes over the last two decades
require changes in the products to suit the emerging needs of the customers.

Also, need to be considering the change in the marketing and distribution from the more traditional
approach to online and digital mode. The present-day customers require more ease of operation in their
execution, so the providers need to be prepared for the present-day change and emerging future.
Digitalization is the new mantra for success.

This change not only going to transform the Indian financial market in the future but will also give new
risks that this side of the world has never witnessed. So this is a very challenging environment for the
financial services players to operate in the next one or two decades. Those who will manage the digital
world better with better risk management will be the new leaders.

The summit tried to answer some of the above questions whose details are given below

Customer’s need

There was almost consensus that the identification of customers’ needs is one of the key requirements
for the success of financial companies, especially where some of the areas such as insurance and mutual
fund require more of a push. Market research is one of the important tools to identify the customer’s
need; however, many companies still consider market research as luxury. It means that most of the
financial players are manufacturing their products based on sales feedback. There is a need to change
the approach of providers to reach the customer to understand their needs, this could be expensive but
the sales volume may recover any additional cost incurred on market research.

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Understanding the customer’s mindset and their trust in the brand value is instrumental in the buying
behavior of the customers especially in the banking and insurance sector where traditional customers
like to move more towards the established brand.

Customers are looking for simplicity over more choices responsible for the success of financial
distribution; the providers are to understand the limited understanding of the customers and every
customer should not be judged from the yardstick of metro city customers approach. More choices to
the customers may confuse rather than providing more choices. Maybe for more sophisticated
customers, more products choices may be given compared to lesser sophisticated.

It is important to read the customer’s mind, where they look to assured return irrespective of whether
the providers are mutual fund or insurance. This mindset is more influenced by the various
advertisements on the assured return along with the history of fixed deposits in the banks in the past.

Manufacturing of products based on target market makes a more focused approach rather than fitting
everyone with the same products. A lesser financial aware customer may not be ready to take more
risks compared to a more financially aware customer who may take more risks and invest in equity-
related products.

Digitalization
The first revolution up till now came through customers physically visiting the stores and making a
purchase; however, things have fast changed over the last decade in India where there is a lot of focus
on customer’s ease of operation with the use of online and digitalization. With the advent of the
smartphone, cheaper data and focus on online distribution are fast changing the way Indian customers
make their purchasing. The providers of products are also spending more money on upgrading their
infrastructure to meet the future demand for online services. Even in the villages, they have started
using cheaper smartphones imported from China. The size of the bank branches is shrinking even in the
rural areas and mobiles are taking the place of bank branches. In the future, the bank branch may cease
to exist with mobile doing the job of the bank.

The banking industry is spending on digitalization, sensor-based technology, artificial intelligence, and
the internet of things. As a result of this, there is already a paperless account opening/mutual fund and
personal loan, one app for all bank needs, paperless credit and debit card, etc. On the security side,
strives have been made towards enhancing the security compared to the current One Time Password
(OTP) through face recognition, iris scan, speech recognition, and fingerprint. It is acknowledged by
everyone that Addhar has helped in digital verification of customers and it is very convenient.

All the financial services industries mutual funds, insurance, and banks are spending on upgrading the
infrastructure. The future survival of financial services industries will depend on new technology for
marketing and distribution. Some of the older methods of reaching the customer may go away and be
taken up by softer mode. With such a rapid change in the landscape, a new level of fraud and risks will
emerge, so future success will not only depend on the investment in digital but the risk management of
digital risk because the entire market will change.

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From the customer’s point of view, they also have to learn to store the soft files and retrieve them at
the time of need. In this regard, some of the teething problems may need to be addressed through
customer education.

Customer education
There is a need to invest in the area of customer education; this is true at least in mutual funds and
insurance as banking is known to everyone. It was made to know that the penetration of mutual funds is
lower compared to the insurance industry. It was also informed that the mutual fund is investing around
2 basis points of the total mutual fund towards the customer’s education. A similar approach is required
in the insurance industry as well. The penetration in the insurance industry is largely due to the
regulatory push either due to tax benefits in the insurance products or mandatory purchase in the
motor insurance. Even the health insurance is largely driven through mediclaim sold by the general
insurance companies and purchased as a bulk product for employees by the employers. The true
insurance penetration would come only if the customer walk to the insurance company branch to
purchase for the protection or savings need, for this purpose customer education is a must. The
regulator may keep a few percentages of Assets Under Management for insurance companies
mandatorily putting in the customer education kitty.

Insurance Sector

Customers continue to pose challenges to insurance companies in all three areas of life, health, and
general insurance about meeting the top line and stickiness with one insurance company. Customer
needs continue to be the prime criteria of product manufacturing focal point. The key challenges in the
distribution have been what customers want, managing the distributors and their needs and satisfying
their demands, creating a balance between various stakeholders such as shareholders, regulators,
customers, and distributors, time lag between the concept stages to launch stage such time lag may
wipe of short to medium-term opportunities. The regulator has brought up a simple product concept
through the point of sale (POS), where the short-term demand can be catered to.

On the technology side, insurance companies are heavily investing in the digital world and it was
acknowledged the help online systems have to provide in knowing the customers through the use of
Addhar.

On the health insurance side, some companies are focusing on the customer’s wellness side rather than
focusing on the sickness pitch. This means that insurance companies are focusing on the customer’s
wellness through regular monitoring of the customer’s fitness and adjusting the premium in the
subsequent year. This helps customers in the good health, helps insurance companies through
increasing customer retention, and also helps in managing the claim ratio to a manageable level.
However, such connection with the customers has its own cost, which if managed well can be very
useful for all the stakeholders.

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This wellness approach helps reach the customers with the existing disease as their morbidity will
improve with regular monitoring.

A similar approach can also be made in the life insurance sector subject to regulatory approval. This
approach may however present some challenges in adjusting the future premium due to improvement
in health as premiums remain level through the policy term. This could be possible under reviewable
term products after a frequency of five years where the experience of term portfolio may be passed to
customers by increasing the sum assured.

Mutual Fund
Though the mutual fund is in existence since the days of Unit Trust of India in 1963-64, however,
relatively a new player in the game compared to insurance and banking. The penetration of mutual
funds is lower than the insurance partly due to lower exposure of people to these products and partly
due to little regulatory push compared to insurance products where tax benefits are there. For the
common man, mutual fund presents different opportunities in maximizing the return based on their risk
appetite. One of the key features of mutual fund products is that it presents inflation-linked return. On
one hand, the availability of liquidity in the mutual fund presents a good opportunity for the short to
medium-term investors to liquidate their assets in case of need, while on the other hand could pose
challenges for the long-term investor who may get lured with liquidity defeating long term needs.
However, this is a design issue of the products, which may add more variety and vitality if the locking
period is increased to 15 years matching with PPF by tenure and higher return due to exposure in a mix
of equity and bonds.

The mindset of customers is now changing from assured return mode to taking more risks, however, this
phenomenon is observed in metro cites compared to other places. The customers need to understand
when taking the risk that they may not make money all the time, for this purpose, long-term investment
is necessary.

The industry has seen tremendous growth over the years –as of May 2018, AUM stands at Rs. 22.60 lakh
crore; there are 7.35 crore folios or accounts, and 39 fund houses or AMCs. SIPs contribution more than
doubled from Rs. 3,189 crore in May 2016 to Rs. 7304 crore in May 2018.

In the mutual fund advertising and marketing are governed by SEBI MF Regulation 1996. There is a
requirement of use of no celebrity in the advertisement; the advertisement cannot display future
prediction, this could be due to uncertainty that the market presents to the investors. There are defined
parameters for print media as well as for the audio-visual where disclaimer on the screen for at least 5
seconds, in a legible font-size covering at least 80% of the total screen space and accompanied by a
voice-over reiteration.

Banking

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The banking industry faces comparatively lesser challenges in reaching customers compared to
insurance and mutual fund, due to the historic presence of banks for savings. Some of the banks are
making innovative ways to reach the rural areas, where the marketing is based on the tools available
within the rural areas such as sponsoring the local sports where the rural population participates in a big
way. Such banks are also analyzing the customers’ behavior to identify the suitable product for them. It
is observed that even in the rural areas, the smart phone has reached and they leveraging this tool to
reach to them. A similar approach may be used by the mutual fund industry and insurance industry;
this will also reduce per unit distribution cost. The needs of the customers in the rural areas are very
different compared to urban areas and banks are using such differentiation. It is observed that in rural
areas, the ticket sizes are smaller, say the personal loan could be in the range of 20K to 30K.

Housing Finance
Housing finance is a relatively new product compared to banking and insurance. The post-liberalization
of the economy has given a boost to the income younger generation leading to an increase in the
purchase of housing at an early age compared to the earlier regime of the 1990s and earlier. Since the
year 2000, there has been a spurt of housing projects where many people purchase multiple houses for
investment purposes.
The economic turmoil and demonetization have taken a hit in the housing sector affecting adversely
housing finance. The repayment of the loan by the customers is dependent on job security which is in
turn dependent on not only the local economy but also the global economy due to many back offices
jobs in India. The risk of property market crash will be there till the time we are dependent on the
development of the global economy.

Similar to other financial products, housing loans also have low penetration at 2.5%, which is much
lower compared to China at 5.4%. The maximum housing loan penetration is in Sweden at close to 60%.
This indicates that there is a lot of scope for improvement in the future. The tenure of the loan is lowest
in Turkey at 7 years and 45 years in Sweden with a median term of 25 years. The Government’s
initiatives of housing for all by the year 2022 will increase the housing loan demand.

The customer segmentation is based on income level and their attributes are different; the more elite
customer is digital savvy, their credit history is relatively easily available and income details are easy to
access. The customers with lower income segments, credit history details are not so easily available, the
income documentation availability is challengeable and they are lesser digital-savvy. In this sector, the
loan disbursement process cannot be completed online as the customer is to visit the bank branch.

The establishment of the Real Estate Regulatory Authority (RERA) by the government in 2016 has helped
the buyer restore confidence in the sector. The projects by the builder and agents are to get registered
with the body. Until now the terms and conditions were in favor of the builder, this will create more
equity among the customers along with confidence. The 2018 budget has taken sheen out of buying the
second house, this may impact the housing loan industry. From the customer’s point of view, the second
house investment may not be easy now. This would mean that customer will park their money in other
financial instruments such as mutual funds, insurance, or directly in the equity market.

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 Conclusion
Overall, the summit was a success with many different topics coming for discussion ranging from
banking products; insurance, mutual fund, and housing finance. Some of the common themes coming
out focused on customers’ needs, the market research was acknowledged as a luxury but agreed that
this is a great tool highly underutilized. There was almost a consensus that there should be another
summit on customer education. The investment in customer education will go in a long way helping the
financial services industry in gaining a strong footprint for the long term. Customer education will also
reduce mis-selling. Digitalization is the next wave and those who manage this platform better will be
the future market leader. Those embarrassing the digitalization late may go in a Nokia way. The rural
sector presents large potential, they need to be leveraged as a separate customer segment and dealt
with them separately, their needs are very different compared to the non-rural areas.

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