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Despite the apparent success of Jan Dhan Yojana, our financial sector penetration is really in a mess. Just a look at the life insurance penetration data – 3.1 per cent of the gross domestic product (GDP) in 2013 – tells the entire story. The penetration of mutual funds will be much lesser. One of the main reasons for this low penetration is the different laws governing the sectors and the completely different distribution systems which are at extremes, to say the least.
For example, the insurance industry is completely closed. Banks are allowed to sell only one life insurance and general insurance company’s products. Most of these banks have joint ventures with international players, who would have wanted to benefit from the banks’ large branch networks. Despite this, insurance penetration is down 150 basis points from 4.6 per cent of GDP in 2009.
What do these numbers tell us? The huge branch networks haven’t achieved so much in terms of increasing sales or covering more people. Also, given that they are only selling one company’s product in each category, they don’t have a big enough bouquet like, for instance, Life Insurance Corporation of India. From the customer’s perspective, even if there is a cheaper or better product in a category by another player, he/she has to go to that particular insurer to buy it. This acts as a deterrent.
The other extreme is the mutual fund industry. Due to open architecture, banks are allowed to sell schemes of all mutual funds. But penetration continues to suffer because some of the leading banks push only their products. Some public sector banks that have tie-ups with foreign fund houses or have their own asset management companies push only those products. Some like State Bank of India, United Bank of India and Canara Bank have collected as much as 96 per cent to 99 per cent of their mutual fund brokerages from their own asset management companies, according to data collated from Amfi and company websites. Clearly banks are just pushing products that they want to sell and not necessarily, the best product for the customer. However, unlike insurance, the customer can ask for a better mutual fund product if he has done his research. But the question: Will the bank sell it?
Bankers will argue that since they have tie-ups with foreign or other players, their first commitment lies with their joint venture partners. True, but they aren’t doing justice to anyone if the penetration of insurance is falling every year and their mutual fund businesses aren’t making any headway. Despite recent RBI guidelines allowing bankers to become insurance brokers, reports suggest that most aren’t likely to bite the broker bullet.
A solution, say industry players, can come from the government who as a majority shareholder in public sector banks can nudge them to aggressively sell these products or even become brokers. Another solution can be capping the percentage that a bank can earn by selling its own asset management company’s mutual funds or as an insurance broker. Even if it is capped at 50 per cent, banks which are serious about this business will aggressively sell others’ products to keep their business viable. Others who are not interested will exit or shrink further. Of course, some players may come together and form a cartel to sell each other’s products. Then, there is the Competition Commission of India to contend with.
But, there needs to be a solution, and fast. When setting up of the Financial Stability and Development Council in 2010, then Prime Minister and now President Pranab Mukherjee had famously said: “What do you expect me to do, will I remain a mute spectator, if they (regulators) quarrel like petulant children?” After over four years of its formation, the wide variance in regulations continues to prevail. The customer, consequently, is the loser.
