Strategy

Country Report: The Burgeoning Wealth Management Sector in India

Lachlan Colquhoun, Sydney, 28 June 2005

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The burgeoning wealth of India’s new generation of high net worth individuals has made the country a major focus for some of the top private...

The burgeoning wealth of India’s new generation of high net worth individuals has made the country a major focus for some of the top private banks in the world, who are rushing to set up operations in what has been a traditionally underserved market.

And increasingly they are targeting onshore money and leaving the non-resident Indian market to the Middle East and Europe.

The roll call of major international private banking players attempting to make inroads in the Indian market includes UBS, Citigroup, HSBC, ABN Amro, Merrill Lynch, and BNP Paribas, while Societe Generale has a launch date slated for later this year.

Deutsche Bank is the latest big hitter to announce a private banking initiative in India. Other foreign banks are expected to follow. On a recent trip to India, Pierre Mirabaud, chairman of the Swiss Bankers Association, said that Swiss banks were looking at taking up stakes in Indian private-sector banks.

They are competing with developing offerings from local players such as ICICI Bank, UTI Bank, Centurion Bank and Yes Bank.

“We have a full commercial banking licence and a merchant banking licence in India, and we’ve been there for 20 years or so, but in terms of private banking we are keen on setting up a full-fledged operation,” Balakrishnan Kunnambath, SG’s global head for the South Asian sub-continent, currently based in Singapore, told WealthBriefing.

“The launch will be later this year, subject to regulatory approvals, and I think there is a major opportunity.”

Mr Kunnambath said he plans to add around 15 new private bankers within the next year.

The recent Merrill Lynch and Capgemini World Wealth Report highlighted the pace at which wealth is being accumulated in India, and illustrated why the country features so prominently on the radar screens of many private bankers.

The report described India as “one of 2004’s high growth areas” and estimated that the number of Indians with financial assets of $1 million or more — excluding their primary residence — grew by 14.6 per cent over the year to just under 70,000. In raw terms, almost 9,000 Indians became millionaires in 2004.

According to other estimates, Indians living at home and abroad have accumulated a total of $580 million in wealth.

The Merrill Lynch/Capgemini report also predicted that the number of high net worth individuals in India would more than double to 1.6 million by 2009 — a date which also coincides with another already-announced regulatory signpost on the way to liberalise the Indian financial services and banking industries.

Pradeep Dokania, the executive vice-president of the Global Private Client operation in India for DSP Merrill Lynch — a venture between the US giant and local player DSP — says that while the wealth of Indian families and individuals is growing fast, the wealth management, and private banking industries are only now starting to gain some momentum.

“Earlier, these people were typically investing in their own businesses, they weren’t really taking money out and if they were they were investing in visible areas such as real estate,” Mr Dokania told WealthBriefing.

Investing schemes where the Reserve Bank of India offered above market interest rates for government bonds, sweetened with tax free status, also provided a ready financial instrument for any liquidity.

But the end of that scheme has coincided with a share-market boom and the explosion in wealth underlined by the Wealth Report.

“I think things have changed dramatically now and I think people are starting to think about creating wealth outside of their businesses,” said Mr Dokania, who adds that wealthy Indians are only now becoming comfortable with the idea of paying fees for financial advice and management.

“Of course as wealth increases it has to be managed, and quite a few families now have amounts of around $25 million or so, and they are thinking that to preserve their wealth they show focus on their business, and that their wealth management should go to experts.

“We haven’t got a mature market in services such as hedge funds, private banking or private equity but these are things which are now trying to happen, although they are not yet available in any structured manner.”

Mr Kunnambath agrees, saying that many wealthy Indians are now looking for a “trusted personal advisor.”

“In particular with the new rich, yes they are very wealthy but at the same time extremely busy with their businesses, so they see the need for the kind of service we understand and can deliver,” he said.

“At the high end of the strata these people now want individual attention and tailored solutions, so our approach will be to offer wealth management solutions along with a wide range of products like corporate trustee services.

“In the past, private banking in India was like a glorified form of priority banking, but what you are seeing now is the global industry — and institutions like ours — moving in to offer international standards in private banking for these calibre of people.”

SG, which has assets of around $10 billion in its Asia-Pacific private banking operation, has earmarked India as a major regional priority. In mid-2004, the bank added to its capabilities on the sub-continent through the purchase of a 37 per cent stake in the funds management arm of the State Bank of India.

Wealth management, however, has some catching up to do in India. In the fund management industry, for example, only 35 per cent of the estimated $38.5 billion in funds under management is held by retail investors, the majority being held by corporate investors.

But that situation is about to change rapidly.

“A lot of international players in the financial services industry are feeling that they should be present here, and wealth management and private banking is now a very talked about industry,” said Mr Dokania.

“As the Indian economy grows by 6 or 7 per cent a year a lot of first and second generation wealth will continue to grow, and those people are going to want to preserve wealth, diversify, and they’ll need professional help.”

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