75 years as a free, democratic, and independent country has been adventurous. We have made massive strides, yet there is so much to be done. The same applies to the story of individual financial freedom, household savings and financial markets in independent India.
In 2017, RBI’s Household Finance Committee, led by Tarun Ramadorai, produced one of the most comprehensive reports on the state of India’s household finance. The study found that an average Indian household has 84% of its wealth in real estate, 11% in gold and only 5% in financial assets. It found that a reallocation of a quarter of gold holdings towards financial assets could push households by 1-5 percentage points up the Indian wealth distribution.
This shift seems to be, gradually, underway today. Mapping the financial industry's evolution is necessary to understand where we stand and what is in for tomorrow.
1991: Unlocking Banking and Financial Markets
Indians have always turned to saving and investing to achieve their idiosyncratic goals and strive for financial freedom.
1991’s economic liberalisation unlocked avenues of saving and investing from the government’s clutches. Until then, deposits were controlled by nationalised banks and post offices, insurance schemes were run by the Life Corporation of India, and the Unit Trust of India, virtually, had a complete monopoly over mutual funds (MF). Most Indians chose real estate and gold as investment vehicles.
The 1991 reforms – which also created a new middle class with higher disposable incomes – unleashed innovation in the financial sector. The entry of private banking entities (HDFC, Axis and ICICI) brought new products, services, and choices to markets. Their technology-first approach increased the speed, scale and efficacy at which customers were serviced. Banking deposits increased by over 200% within 3 years and 500% in a decade. The entry of small finance and payments banks in the 2000s only aided this effort.
The Indian stock market was, then, characterised by a closed cohort of brokers, high transaction costs, opacity over trading and arduous time taking settlement processes. The 1992 scam ushered in big-ticket reforms. The National Stock Exchange was established as India’s first electronic marketplace giving significant competition to the Bombay Stock Exchange.
Securities and Exchange Board of India (SEBI) was elevated to a statutory autonomous agency. The introduction of a screen-based trading system saw trading move from a closed hall in Mumbai to brokers’ premises across the country.
On the other hand, MFs took shape as a single industry with the entry of private players in 1993 – breaking UTI’s monopoly. The industry witnessed significant restructuring and growth through M&As. With ₹470 billion in assets under management (AUM) in 1993, the pool grew by 400% by 2003, and nearly 2500% in the subsequent two decades. As of 2020-21, the industry had ₹30 trillion in AUM.
Technology and the Regulator
The role of SEBI and digitization across the industry bears significant mention in this journey. SEBI, since 1993, has played a critical role in protecting retail investors’ interests against market manipulation and price rigging, increasing their participation, and thereby mobilising small investor capital. Its efforts to widen investor education have significantly improved awareness.
Its unambiguous interventions have enhanced the efficiency of markets and the industry multifold. Settlement cycles, from 45 days, are now at 1 day – the fastest amongst major markets in the world. A robust depository system in CDSL and NSDL – that ensures securities are not held by brokers – has increased transparency and curbed brokers’ potential coercive powers.
SEBI’s strict allocation rules for new offerings ensure fair participation for everyone, unlike the US where bankers have the final say. Furthermore, the entry of fintech moved broking online, reducing brokerage costs by ~80%. SEBI’s efforts to cap expense ratios of MFs and digitise the entire transaction chain have increased overall distribution and retail investor participation. Indians began to rethink their idea of financial freedom.
Today’s shifting winds
Despite this growth, the 2017 RBI report made a far cry for the “financialisation of savings,” and a stronger move toward financial instruments for higher liquidity and diversification. Its three major recommendations, and the role of technology in realising these, are now underway in India.
First, fintech, today, are disrupting markets by democratising and offering low-cost customised products, at scale, for niche and underserved customer segments. Using AI and ML, they thoroughly gauge user needs, goals, and risk appetites to provide tailored advice and products.
Furthermore, they educate users. Their innovative user experiences reduce cognitive load for simpler decision-making. Particularly, for long-term wealth creation, by offering access to direct MFs, they have reduced cost structures by nearly 400%. This creates significant value for investors in the long run.
Second, COVID-19 ushered in fully digital onboarding processes across the financial industry. The India Stack and UPI have simplified KYC and payments respectively – eliminating paperwork and reducing costs. Upcoming digital public infrastructure (the Account Aggregator, Public Credit Registry and Open Credit Enablement Network) will only augment this.
Third, the ubiquity of financial advice across the internet is solving information asymmetry. Social media influencers are creating bite-sized, relatable content on personal finance. Online communities are facilitating the exchange of information and experiences. This adds intangible trust to the overall ecosystem.
All this has translated to increased retail investor participation since 2017. MFs witnessed a 220% increase in new investors and a 380% increase in monthly SIP flows. A survey by a leading fintech shows that 80% of young Indians started their investing journey during the pandemic, 30% are saving for their evolving lifestyle needs, and 60% have made wealth creation for financial freedom and early retirement a top priority.
What lies ahead?
In the future, core products will move towards low-cost passive funds like Exchange Traded Funds which provide similar returns as active funds at much lower costs. Young Indians will opt for low-cost models while balancing them with high-risk and return products. Alternate asset classes such as community investing in startups, peer-to-peer debt bonds, fractional investment in real estate through REITs and private bond markets will become mainstream.
India, today, has managed to liberalise markets, democratise access, and build robust mechanisms for investor participation. Yet, most remain at the margins. Getting them into the fold, at a time when India is predicted to have high growth rates, is a colossal challenge.
If there is something our freedom struggle and 75 years thereafter have taught us, it is the ability to overcome severe adversities. In 1947, most believed the political project of a democratic India was unattainable given our sheer diversity and social realities. Nevertheless, we stuck together and created a relatively prosperous country, and the same can be done for more individuals and their personal finances.
Anurag Reddy is theVice President of Product and Chief of Staff at Dinero