For an average Indian investor, if the turn of the 21st century was about moving beyond the comforts of fixed deposits to market-linked products, the first 10 years were spent discovering the imperfections of the market. Fragmented markets with regulators fighting over turf left investors confused and grappling for recourse.
The start of this decade held out hope as the Financial Sector Legislative Reforms Commission (FSLRC) identified the problem and called for unified regulations along with a unified redressal system. Seller beware and suitability have remained just words and not been implemented. The big-picture reforms continue to elude the financial sector, but plenty of incremental steps were taken. Here is a look at what worked and what did not across industries.
If there was a coming of age moment for a financial product in the past decade, it was for mutual funds, as the industry grew almost fourfold over the decade to ₹27 trillion at present. The big hero has been the systematic investment plan (SIP) that captured the imagination of the investors. It matched with a psyche that’s diffident about committing a lump sum to the market. Even in the volatile markets of 2019, SIP flows remained steady at ₹8,000 crore per month.
Regulations too kept pace to make MFs customer-oriented. The year 2013 saw the launch of direct plans that made them cheaper for DIY (do-it-yourself) investors. In 2017 came the categorization of MFs to make them true-to-label. “Scheme categorization was a major regulatory development. You rarely see a regulator laying down such detailed rules,” said Kaustubh Belapurkar, director, fund research, Morningstar Investment Adviser India. In the same year, the Securities and Exchange Board of India (Sebi) trimmed the expenses further and abolished upfront commissions for distributors.
However, MFs drew flak as credit downgrades and defaults exposed lax regulations for debt funds.
Technology made banking seamless, swift and low-cost in this decade. The National Payments Corp. of India’s UPI, which went live in August 2016, has truly changed the payments space. “In a short time, about 20% of all online transactions we get are on UPI, which is close to the credit card numbers,” said Akash Gehani, chief operating officer and co-founder, Instamojo, a payments gateway. “It has been a decade of inclusion, digitization and experimentation,” said Ravi Rajagopalan, managing director and CEO, Empays Payment Systems.
But bank customers continue to be mis-sold own and third-party products. The Reserve Bank of India (RBI) remained reluctant to take its role as the protector of retail consumers seriously for a long time. It was only in 2017 that RBI allowed customers who were mis-sold third-party products to approach the banking ombudsman. RBI’s charter of consumer rights in 2014 remains on paper. “It doesn’t talk about how banks need to implement it; who will be held responsible for not adhering to it; and the action that RBI would initiate if the charter is not followed,” said Harsh Roongta, a Sebi-registered investment adviser.
It also hasn’t helped borrowers who took floating rate loans and were hopeful of seeing their EMIs reduce in a lowering interest rate regime. But the scams and mounting non-performing assets left little scope for the banks to transmit the lowering rates. RBI changed internal benchmarks (to which interest rates are pegged) twice, before moving on to an external benchmark to ensure faster transmission.
In all, the banking reforms were largely led by the digital revolution but banks as efficient intermediaries still have a lot of ground to cover. “RBI has repeatedly failed the smell test when you look at the credit events. It lacks the regulatory muscle when it comes to consumer-facing reforms,” said Shyam Sekhar, chief ideator and founder, iThought.
Other than direct sales of term plans, the cheapest way to buy life insurance, the industry has not progressed at the desired pace. Policies die early and mis-selling is still the norm. Things would have been different if the unit-linked insurance plan (Ulip) reform of 2010 had been extended to traditional plans as well. The Insurance Regulatory and Development Authority of India (Irdai) has reduced costs in traditional plans but it’s still a far cry from what Ulips charge. Traditional plans continue to be opaque, put more money in the hands of agents and take away a significant chunk of the principal if surrendered midway.
Front-loaded commissions are arguably one of the major reasons for product churn, but Irdai has been shy of moving away to a trail model. According to Kapil Mehta, co-founder, SecureNow Insurance Brokers Pvt. Ltd, “Listing of insurance companies has been the marquee event of the decade. There is now a focus on improving persistency and reducing costs that will get adopted by non-listed companies also.” A missed opportunity has been to make traditional life insurance more transparent so that policyholders understand the benefits and costs better, he added.
Health insurance has seen dramatic transformation in the past 10 years. The launch of Ayushman Bharat gave an additional push to the industry to review and rationalize exclusions. However, public disclosures need to get better regarding claims, mis-selling, persistency patterns of insurance products and so on.
The decade saw some important changes in the National Pension System (NPS). In 2016, NPS got the tax push when contributions to NPS qualified for an extra deduction of ₹50,000. Next, investors were allowed to invest up to 75% of their corpus in equities. Another big reform is still underway—it looks at giving choice to NPS subscribers to move from a compulsory annuity to a systematic withdrawal plan.
NPS also saw some tinkering with the original architecture when the regulator moved from passive to active fund management and allowed fund managers to market NPS.
The success of NPS shook the Employees’ Provident Fund Organisation (EPFO) out of its comfort zone that allowed equity investment for the first time in August 2015. But there are problems with this as unitization has not happened yet. On the plus side, technology has made EPFO customer friendly as withdrawals and transfers have become a lot simpler. One big concern about EPFO remains its asset-liability mismatch. “There is no mark to market valuation of holdings in EPFO and PF trusts. Low-quality bonds are marked at the same value as high-quality papers,” said Amit Gopal, India business leader, investments, Mercer.
From double-digit returns of the previous decade to capital losses in this one, the sector saw it all. “There is a lull in the market. Earlier (2002 to 2007) we could sell around 15-20 units in a couple of days, now it takes months to sell that many units,” said Avneesh Sood, director, Eros Group, a real estate developer.
The impact of slowdown coupled with the game changing introduction of the Real Estate (Regulations and Development) Act (Rera) in 2016 has shifted the balance in favour of buyers, although only slightly. “Rera brought in the much-needed discipline in the sector,” said Pankaj Kapoor, managing director, Liases Foras, a Mumbai-based real estate research firm. However, Rera is still a work in progress. While a few states are yet to notify Rera, some others are yet to establish a regulatory authority and appellate tribunal.
The decade gone by saw a clean-up of boards and improved corporate governance. It saw tax payments and refunds get a tech push and the number of taxpayers rise. If we were to sum up in one line the big story of the decade, it is this: technology gave a boost to speed, transparency and lower costs. If only Irdai and RBI had been more like Sebi in consumer protection, the story would have been different.