DO WE THINK HOW MID OR SMALL IFA WILL SURVIVE

MF Distribution Is no Longer a Bed of Roses

Are you thinking that should you recommend someone to join the Financial Distribution industry as a job option? Are you getting butterflies in your stomach to take the decision? Do we think about the middle and small segment of IFA? Well, you are okay and don’t think that you have some health problems. The crisis of Franklin Mutual Fund has created a big problem for the Mutual Fund industry as well as for the Investment Advisor or Mutual Fund Advisors. Clients have changed their mind-set towards Mutual Fund and hence there is a spike in bank FD. Safety and easy liquidity (The Franklin issue) is the factor which is chasing the asset class. As of July 17, 2020, outstanding bank deposit amounted to Rs. 140 lakh crore. The incremental bank deposit growth was at 3.3% during April’20 – 17th July’2020 compared with the 0.6% growth registered in the corresponding period last year.

Net redemptions in equity mutual fund schemes rose to a four-month high of ₹16,622.01 crores in July, up 22.9% from ₹13,520.03 crores in the previous month and from ₹12,173.81 crores in the year-ago. In July, except for ELSS and Focused Fund categories, all the other equity categories witnessed net outflows. Multi cap mutual fund category was the worst hit, followed by mid-cap and value fund categories. Inflows into equity schemes have been slowing down after the robust net of ₹12,175.04 crores seen in March. In June, net inflows were at ₹240.55 crores, the lowest in 51 months. In July last year, these funds received ₹8,133.21 crore worth of net inflows. The mid or the small -class broker doesn’t get Debt Tickets. They get mostly equity since that is easier to pitch based on their ability. Now with net outflow how they can pull their kitchen. This equity outflow means that retail is damaged to a great extent and their recovery is time-bound.

Due to the fiasco of Debt Mutual Fund equity funds also have lost the attractiveness. The Mutual Fund investment is being compared with Direct Equity. The fall of the market has turned every investor a Fund Manager. Thanks to Reliance and Ruchi Soya for making the new Fund Managers be gem. Online trading platforms have swelled up with new account opening. Clients have turned away from MF and the distribution industry product offering like PMS and AIF. Investors who are particular millennial are getting better offering through digital platforms and other direct options to invest.

On the other hand, the Mutual Fund industry is struggling to generate a return attractive to FD and also could not win the confidence of investors. An outflow of over Rs 94,200 crore into mutual fund (MF) products in the preceding three months, within the fixed income securities or debt funds, liquid schemes, where most of the institutional money is parked, witnessed inflows amounting to Rs 86,493 crore in the last 3 months. Well in July they made a stunning comeback. But this comes back is short-lived once the Moratorium comes to an end and there will be pressure to pay back.

On the other side, the job risk of wealth managers is high. 28% of Industry’s Net Equity Sales were delivered by ETMONEY during June. Direct plans are slowly eating up the share. Well, all gains to investors but what about the IFA and their bread and butter. Advisory is these times is not only difficult but a starving option for the practising IFA (who are not in the job). Those who are in the job are now getting challenged by revenue margins and online sales growth. The story is not yet over. The industry is now struggling between the battle of Direct and Regular Inflow. 

 This outflow will continue until the gap of valuation of stocks does not go up and it becomes quite difficult to invest in higher levels of markets where Expert Professional Fund Manager does not come into play.  Secondly, unless the Job market is secured and people are able to come out of the depression of their family from covid and salary cuts and other things. We will witness more outflows and pressure on the business as the free lunch is shut down and there is pressure on the repayment from banks. Does falling margins, falling sales, dead clients (financially) compel to think of change of business line or profession?

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COVID AND INVESTMENTS BATTEL

Investments have gone for a toss. Savings have been diluted for paying bills. Mutual Fund stock redemptions have increased and will continue its journey.  In the coming months, we don't think that the impact of redemption will end. families are struggling to pay bills and many of them helplessly are letting people to loose as they could not afford the inflated cost.

How much valuable is Covid Insurance? Well the answer lies in 90460 have claimed and the amount stands to Rs. 11463 cr.   The covid insurance has been a boon for all those people who had health insurance policies as well for those who did not have health insurance policy. The reason being that Covid treatment is manipulative treatment cost. Do you all know how many families committed suicide? He due to Covid? How many people lost their loved ones due to the highly inflated cost of treatment? We all know that how much investments have been withdrawn for the treatment cost of Covid 19. People have sold their jewellery, took loan, mortgaged their houses to fight helplessly against the inflated covid treatment cost.  More redemptions to investment products  follow to fight against the inflated treatment cost of Covid -19

 Covid has created one of the biggest revolution particular in India about health insurance. Indian is a country where people lacked health insurance awareness and most importantly when it comes to insurance people are more concerned about what they will get when they are alive. Covid has changed the perception of the people about health insurance

People who had an employee group medical insurance neglected to have individual health insurance have changed their mind and have come for separate health insurance or covid insurance policies. One of the segments which opted or should opt for Covid insurance exclusively is those who have family floaters.

Now the question will come why those people require covid insurance separately when they already have family floater covering to the tune of Rs 10lacs to Rs.15 lakhs?  Since the malpractices in Covid treatments cost is so high that these coverage of family floaters are falling short.  For example a single injection of 648 mg cost form local vendor at the inflated price for Rs 1.5 lakh. The same is available at a better price – Rs 92,672. For 30 days of hospitalisation, his father was handed a bill of Rs. 10.26 lakh. Their medical insurance covered only Rs 4.5 lakh of the treatment cost. Further India has always been a low health insurance coverage market. People have simply taken health insurance just forsake.  This is a major flaw which still continues and it is prayed that the current times teach people to come out of this under insurance mindset.

In another instance 400 mg of tocilizumab cost for Rs 1.4 lakh.  One person managed to get the drug from three different vendors in Ahmedabad and Hyderabad for Rs 25,000 for 80 mg, Rs 32,000 for 400 mg, and Rs 42,000 for 400 mg.  The story is not yet over. In another instance, Ambulance charges Rs 8,000 for transporting Covid-19 patient for 200 metres. The PPE kit is being sold at Rs 2500 to Rs 4500 in many places.

In many states, beds are being sold and inflated prices of treatment are being offered. Hospitals have come up with a package model. It works out to ₹1 lakh per day for critical care, irrespective of which corporate hospital one goes to. A 20-day package costing ₹21 lakh based on the assumption that he or she might need ventilator support.

Government price capping cannot cap the malpractices. Hospitals have multiple options to charge money. The hospitals can charge additionally for Personal Protection Equipment (PPE), interventional procedures like bronchoscopy, biopsy, and pleural tapping, administration of high-end drugs, and high-end investigations like CT-Scan, MRI, and PET scan. Hence the Rs 20 lakhs bill is easily achievable by the hospital.

No family floater can save you or can help you to survive. In many cases, people and families have been forced to let their loved ones to get them loose. Health cost is a different story and manipulated prices are different ball game. Covid Insurance is no doubt is a boon for the middle class.  People have finally accepted that they need a health insurance policy.

 The penetration of health insurance across India stood at around 35% as of the financial year 2018. Lack of health insurance has impacted the families massively post emergencies. In many cases, household debt has swelled up creating more trouble for these middle-class people. The middle class who’s average salary is between Rs 15000 to 100000 has suffered massively.  The cash-rich people also suffered but they diluted their savings at the back of high-end medical cost based on their stature.

Covid is must over and above a family floater. The rising cost of covid treatment will fall short keeping traditional health coverage.

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POST COVID-19 LEADERSHIP CODES

My 1st question to our readers is that are you all ready for the new leadership skills and process.  How much change do you expect to happen in leadership code and skills? Post covid 19 business operation, process and organisational culture will change. As a leader how much old EGO factor you carry from Pre Covid-19 to Post Covid -19. The biggest threat post covid is for the business leaders irrespective of their place, position and industry. The traditional leaders and leadership style does not know how to run the show post-Covid -19 impact. This change will throw out many of the traditional practices in every corner of the business as well as old leaders.  

Cutting down cost was one of the old practices of doing business but post-Covid you have to learn to spend judiciously.  In simple terms allocation of cost with long term benefit. During this covid phase every leader, entrepreneur across the industry is thinking about how to create and explore new business. Well, new industries, organisation, way of process and new customer expectations are on the way to get explored post covid -19. All these are going to change post covid -19.

We are busy in discussing how the world will change post-COVID 19 but did we envisage how the leadership will change in the coming days. Post-Covid 19 there will be huge challenges which will place immense pressure on the leadership skills.  New leaders will be born and old leaders will be scared to lose their hold. This battle is evident and will be witnessed in large scale behind the Board of Director's room or within the middle-level management. Leadership roles need a new definition which will help to fight and create new economy post-Covid -19.

There will be many things which will demand change and that change will be faced with tremendous opposition but the fact is a change in leadership is bound to come.  Leadership will change from competition to collaboration. The individual focussed approach will shift to compassion focussed support. Eliminate competition externally and internally to and change the same into a collaboration to get growth for the organisation. The competition will reduce the margin and the same old mediocrity will control the growth of the organisation. Collaborative mindset will help to grow not only the company but to achieve two different things at the same time1) Growth of the current industry and 2) Innovation of new industries.

One has to eliminate the competition theory internally within the people in the system. Post covid -19 people have become selfish as we said before and hence you need to kill the same. If we don’t kill the competition theory then people in the internal system will become cannibals. The internal challenges will need compassion as anything against compassion will damage the brand and culture of the organisation.

Business leaders, academia and a business lesson all will come together to create a new culture of change in business operation. New leaders have to be more focussed towards collaboration and having a constant eye on the academic findings. If you ignore the academic findings then how one will get to know about the direction of the innovation wind and where the next threat is coming up.  Corporates need to have a close eye on the business school findings and academic research to adapt to new changes.

But among all these new leadership styles and changes what is that one thing which is highly required to be adopted by old leaders? You need Economic, Social and Governance focussed leadership style. We not focusing on the complete elimination of old leaders but we are throwing light on the reborn of new leadership skills hence the old can adopt the new provided the EGO factor does not come in between. EGO kills the transformation phase of the organisation which is highly now a very big barrier.  Transparency in leadership is highly required.

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Refused Moratorium by Banks passed to Job cuts.

In the year 2021 one will get huge quality assets across sectors available at cheap price and banks are simply having an open invitation to come and buy these assets. Before we head collectively towards discovering this segment we need to get to the current positions of the Indian banking system during this Moratorium 1 and 2 phase and how they private banks and small private banks are placed. Banks failed miserably in the last 2 years. Big cats symphony money of the taxpayers and now the same one is being asked to face the heat of refusal of Moratorium.  MSME category is struggling on the road and the voice is unheard.

Most of the Indian banks are looking forward to raising of capital. Particularly the small banks where the liquidity factor is highly required. Retail loans have come down as job loss, pay cuts make them unaffordable for the class.  

The Moratorium 2 has been adopted less as compared to Moratorium 1 –the reason being that banks have become reluctant to provide any moratorium as the final decision lies in the hands of the banks. Hence those are thinking that the Indian corporates have been able to manage the downfall well the Skelton is yet to come out. Private Banks have straight forward refused to provide moratorium in many cases which lead to major impact on cost-cutting and particularly the human capital.  

This vicious cycle has now impacted the retail loan market which holds a significant part of the portfolio of the private banks. Banks have made provisions for the Covid -19 but those provisions will be used for write-off or rising NPA in the H2 of FY-21. There is nothing to be happy that banks have been able to have a lower ratio in terms of Moratorium 2. Private Banks had 30% as of April under Moratorium 1.0 to 10-20% under moratorium 2.0. They have refused to give and this is where the larger picture of NPA will come forward.  Asset base will increase due to the NPA issue and banks will have a stockpile of assets to be sold through ARC window. This is the place where a huge quantity of bad asset will line up for sale.  This will cover all sectors and predominately the retail will be the larger size with corporates often going for low valuation based exit models. 

Banks have built up COVID provisions of 50-200 bp of loans (2-8% of loans under moratorium) over the last couple of quarters.  This is being under consideration that H2 of FY-2020-21 will witness more hiccups when the moratorium ends. Further, the provisions are made to adhoc to cover those hiccups also which will arise where currently unpaid interest is just accumulating. The retail book size is a major concern area which is yet to be identified when the real picture of job loss will come forward.

Coming the borrowing calendar of the banks who are looking forward to raising capital -IDFC (Rs20 bn), Yes Bank (Rs150 bn), and IndusInd (Rs33 bn, Axis and ICICI are also looking to bolster their capital by 200 bp (7% and 12% dilution, respectively) in coming weeks.  This is just the beginning of the raising season. The PSU banks will require an injection of liquidity going ahead as the skeletons come off the economy.

To attract deposit small private banks have marginally reduced their FD rate of interest as compared to large banks.  Banks have played safely but the biggest risk is now passed to the retail through job and pay-cuts and further with retail assets like car, house etc getting into the warehouse of the banks. As per CMIE data, the unemployment rate has worsened to 8.21% as on 26th July vs. 7.94% as on 19th July.  While the urban unemployment rate has been consistently dipping, rural unemployment is witnessing a hike since 19 July.  So now you get a clear picture where the risk has been transferred.

Banks will come up with various instruments to get the pool of funds from the Mutual Fund industry as the dream of chasing alpha cannot be ignored.  Banking and PSU fund will be top of the chart followed with dynamic bond funds. Many corporates are also chasing the capital market for raising capital. When the lucrative offers will raise the capital the markets will find the outflow of the same.

Coming back to where we started ROE of the large banks is better placed as compared with small private banks. They are in the battle of increasing their share of the deposit. The allocation of provision due to NPA is more for the large corporates and less for the MSME. MSME cannot raise capital so easily and under the covid impact the last 3 years good records are shattered.  Those companies which failed to get Moratorium simply reduced the headcounts and salaries. 

The retail at the end is the most impacted.

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