Seema Gupta, a resident of Thane in the outskirts of Mumbai, was hugely successful as a direct selling agent (DSA) of a large private sector bank. But all that she has now is a huge service tax liability and an uncertain future, as the bank has discontinued her services. “They (banks) were like the maharajas who ruled the kingdom, leaving small land owners high and dry,” laments Gupta. She is not alone.
DSAs were the darlings of banks and financial institutions at the height of the economic boom. But in an uncertain macro-economic environment, banks are keeping a tight leash on spends and aiming to improve credit quality. So, direct selling agents, like many other financial service intermediaries, are dying a slow death. It appears the final nail has now been knocked in their coffin, with most banks altering their strategy and building in-house acquisition teams to source loan borrowers.
For instance, Gupta was told the bank would not bear any service tax burden on loans sourced by her agency and the commission would include tax expenses. “It ruined my business. I had to ask my people to leave the agency,” she says.
The fate of DSAs of banks looks identical to that of insurance agents, mutual fund distributors and sub-brokers who went through the grind in the past few years due to shrinking revenues and declining profitability of financial services firms.
Private life insurers alone reduced their headcount 27 per cent last financial year. The expansion of bank branches in the past few years has also played a critical role in reducing the dependence on DSAs in sourcing loan borrowers. Bankers said selling loans through DSAs had turned out to be more expensive and uncontrolled than channels such as bank branches, in-house acquisition teams and referrals.
“Given what has happened in the credit environment, there is a need to have a reasonable volume with good control at a fair acquisition cost,” says Prashant Joshi, Deutsche Bank’s India head of private and business clients.
“The DSA channel is not finding favour because banks are now shifting focus to secured lending due to uncertain macro-economic conditions. In secured lending, margins are lower than unsecured lending. So, banks are also looking at inexpensive channels to sell loans,” he adds.
ICICI Bank, the country’s largest private sector bank, cut its expenses on DSAs nearly sevenfold in the past three years. The bank spent Rs 34 crore on direct selling agents in the quarter ended June 2011, compared with Rs 228 crore it paid in the same period in 2009. The bank declined to comment.
Citibank has decided to complement its third-party sales force with a trained in-house team of ‘universal bankers’ to offer banking services to its clients.
“Our in-house team of universal bankers adopts a customer-centric sales approach, servicing multi-product banking needs, imbibing a consultative selling methodology for seamless delivery and high quality experience to our customers,” says Anand Selva, head of consumer banking at Citi India.
“We continue to focus on consumer lending. We follow a multi-pronged approach and have a comprehensive range of in-house channels, including branches, online banking, phone banking and client acquisition teams, which complement third-party DSAs,” he adds.
Unlike most state-run lenders, IDBI Bank had opted for direct marketing associates due to its limited branch presence initially, after it converted from a development finance institution to a commercial bank.
However, the bank has started reducing its reliance on third-party sales agents as it expanded its network to 883 branches now. “About 20 per cent of our housing loans are sourced through DSAs. The bank will reduce dependence on DSAs further as we expand the branch network,” says R K Bansal, executive director of IDBI Bank.
According to Aniruddha Sengupta, promoter of ISE Personal Financial Services, agencies that diversified their business have been able to survive. ISE Personal Financial Services and its sister concern Arthashastra Financial Planners offer investment advice on products such as mutual funds and insurance, besides acting as direct selling agents for banks.
“The environment has become difficult for pure-play DSAs to operate. The better quality agents have been mostly absorbed by the banks. Many agencies have shifted to real estate broking. One has to diversify business into areas like wealth management, investment advisory and insurance distribution to survive,” says Sengupta.