‘As inflation eases, financial savings should improve’

Aarati Krishnan
Business Line
23 December 2014

With equity assets being so small, how households will meet their long-term financial goals is not clear: Aditya Birla Fin Services CEO

Ajay Srinivasan, Chief Executive Officer at Aditya Birla Financial Services, talks toBusinessLineon why the group is keen to foray into banking and the reforms that can really make a difference to the financial sector in 2015. Edited excerpts:

Aditya Birla Financial Services operates in a diverse set of businesses ranging from life insurance to stock broking. Is this why you have applied for a universal banking license?
We see banking as a good strategic fit into our existing portfolio. For one, today the largest bit of value creation within the financial services space, in terms of revenue or profit happens in the banking space.

Two, more and more of the products and services we offer are being distributed through banks and our top competitors are those that are owned by banks.

Three, we realise that banks enjoy the strongest relationship with their customers among financial service businesses. The frequency of transactions with a bank compared to, say, a life insurer, is very high. Of course, a bank will also help us get low-cost funding for the lending business.

As a group, we are present in the remotest parts of India. We already have vast distribution reach and significant brand equity, both in urban and rural India. Our fertiliser business, for instance, has one crore farmers as its customers. This will allow us to do business very differently from others.

The years since 2008 have been quite turbulent for financial services. How has your company grown in this period? What are your plans now?
Going back to 2007 would offer a good perspective of how we have performed through cycles. Since 2007, our revenues have expanded three times. Our assets under management have grown six times to Rs.1.4 lakh crore.

We were losing money until 2009, but last year we declared a profit of about Rs.750 crore. In mutual funds, in 2008, our total assets under management were about Rs.35,000 crore. In the last eight months alone we have added Rs.30,000 crore of AUM.

This shows the kind of traction and momentum in this business. In lending, our book is about Rs.15,000 crore versus around Rs.500 crore in 2007-08. This makes us larger than some of the smaller banks.

I think we are one of the few firms which have really expanded our lines of business. We have gone from five lines of business to 10 and have added several products within each. But this is not just about having a flag in the ground and saying I have a new business.

Each of them has been growing market share, be it life insurance, mutual funds, lending or broking. We recently entered housing finance and have announced plans to enter health insurance.

How will the Insurance Amendment Bill, now pending in Parliament, impact you? Will the 49 per cent limit bring in FDI?
There are two aspects to the Bill. One is the potential increase in foreign shareholding. Our foreign partner has the right to increase their stake and will, I am sure, take a call as things develop. From an industry perspective, I see this as being a bilateral issue that will have to be resolved between each Indian player and their foreign partner. Apart from this, the Bill seeks to give a lot more flexibility to the IRDA to implement regulations that can help develop the industry.

Today, for instance, agency commissions are capped by the Act, but after the Bill is passed, the IRDA will have the ability to determine them. What the industry needs is the flexibility to innovate more on products.

Given that the group manages both insurance and mutual fund businesses, do you think there should be common rules on disclosure, commissions and regulation of distributors?
I think, all financial product vendors need to do a better job of communicating product features and risks. Product features and commissions will vary across products and that isn’t the issue.

I think, whichever product the customer is buying, whether it is real estate, mutual fund or life insurance, he/she should be sold what is appropriate for him/her. Worldover, regulators are moving towards having clear disclosures and distribution based on suitability — that is, principal-based rules.

In recent years, we have seen household savings moving away from financial assets towards physical assets. What can be done to reverse this?
If we take a 20-year view, financial savings as a proportion of household savings have halved, from 60-odd per cent in 1994 to 32 per cent or so currently. I think the reason has been inflation. This has prompted people to look at assets such as gold and real estate.

As inflation comes down and real returns increase, you should see financial savings improve. But the other thing that has to change is the distribution and communication around financial products. I believe that the Indian asset allocation pattern today may not be good enough to meet people’s financial goals.

Physical assets may not be liquid and they may not be appreciating enough. Even in financial assets, over 60 per cent is in bank deposits, which often deliver a low real return post-tax. With equity assets being so small, how households will meet their long-term financial goals is not clear.

What are the two or three big reforms that can make a difference to the financial sector in 2015?
I think distribution is a big area. In life insurance, bancassurance should be opened up to more than one insurer. Why should a customer of a bank not have the choice of multiple products from his/her bank in life insurance when he/she has this in most other products?

In banking, the key reform is figuring out the direction for the public sector banks. They account for over 70 per cent of the assets today and require significant capital to fund growth. The question really is whether such capital infusion is the best use of the Government’s funds. If it is not, the Government should reduce its shareholding below 51 per cent, allow consolidation and bring in new banks which can fund the economy’s credit needs.