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WF: SIPs and ELSS products - the two key retail propositions of the MF industry - now face some headwinds as the new commission structures make it more challenging to source new retail business. How significant is the risk to retail business growth now, and what steps do you think need to be taken to make these two retail propositions more viable for retail distribution?
D P Singh: There are two parts of it to your question Vijay; one is impact of the new commission structures on retail sourcing and second how we need to strengthen retail sales momentum.
I agree that the new commission structures can negatively impact retail distribution efforts, especially from small distributors. Large distributors with an asset base can manage the transition a lot better. But for small distributors, we have to recognize that there is a cost of acquisition of retail business, which will undoubtedly pay off over a 2-3 year period - but this lead time can make retail sourcing unviable for them, in the absence of trail from an established asset base. Neither does he have a substantial trail income nor access to working capital to help him incur the acquisition costs upfront and earn income against these efforts over the next 2-3 years.
As an industry, if we want sourcing of retail business from small distributors across the country, we have to find a mechanism to compensate them for their client acquisition efforts, at the time they acquire the client. We have raised this issue within the industry and there are discussions underway to find a solution to this problem. I am hopeful that we will find a reasonable solution very quickly, perhaps much before the 3 month period when the new process is anyway due to be reviewed.
That said, I think the larger message for our distribution partners is that we now have a favourable investment climate, investors are willing to invest, markets are supportive. This is a time for us to really reach out to as many investors as we can. Volume growth prospects are very good, and as we all know, when business volumes increase substantially, many of these issues get automatically addressed. Growth is the best solution, and our industry is poised for rapid growth. So, even as the industry works out reasonable solutions to some of these issues, I think all of us need to focus our attention on going out and reaching out to more and more investors and building business volumes.
WF: SEBI introduced a couple of years ago a move to bring in a new category of distributors to sell simplified products to retail savers. We haven't seen much traction on this front yet. What has come in the way of this initiative taking off? What needs to be done to make this a meaningful retail penetration initiative? What are SBI MF's plans on this front?
D P Singh: Yes, I agree that we haven't seen the kind of results as yet that this initiative deserves. But, I am confident that this year will mark an important turning point in the industry's retail penetration efforts. There has been a lot of ground work that has been done, but I think in all fairness, it must be said that last financial year, more attention was given at an industry level to HNI and wealth segments, which were the larger contributors to net assets.
I believe this year will be an important year for retail business in the industry, and one of the key initiatives that will see traction is sale of simple products through a growing channel of new distributors for such products. We at SBI MF have significant plans to grow this segment this year.
I don't think we need to focus much on tinkering with the framework, what we need is to focus more on executing what's already in place. Yes, from a product perspective, I have in my wish list that SIPs of all funds with track record should be included in the definition of simplified products, because SIPs are lower risk investment strategies anyway.
WF: Simplified KYC is seen as one of the big convenience factors that can drive penetration of mutual funds. There were announcements about a unified KYC, there was a move to accept bank KYC as valid for the MF industry and there was an initiative that you were spearheading, of creating a "bulk" KYC process to cover employees of large organizations through a single HR led initiative. What's happening on the KYC front? When should we expect tangible progress on simplified KYC?
D P Singh: I understand that work is being done on finding a way to accept bank KYC as sufficient KYC adherence for mutual funds. I believe we should see implementation by June or July this year. This will be a very big step forward in the industry's effort towards KYC simplification. The caveat that is being considered here is that if an investor whose bank KYC is accepted as sufficient, wishes to change his bank mandate, then we need to first do a complete KYC ourselves. I think this is fair.
Our own efforts on the "bulk" KYC you refer to unfortunately didn't make the kind of headway I wanted, due to too many procedural issues. However, once the bank KYC becomes acceptable for mutual funds, we don't really need to carry out this parallel effort. It will solve the issue. I see implementation of this reform as a very significant retail business driver.
WF: You have been championing the idea of bringing in first time investors into the MF industry through ultra short term plans. How has this initiative worked out so far? How will the new commission caps impact business sourcing on this front?
D P Singh: It has worked out well, and we expect a lot more business traction going forward. We have now given a simple name to our ultra short term product that is aimed at new investors - its called the SBI Savings Fund. We are bullish about growth of this fund and have taken specific volume targets for this product in this financial year. We will put in efforts to widen our reach through this initiative.
As far as commission caps is concerned, I think it is less of an issue for this proposition. A retail distributor who sources Rs. 10,000 in an equity fund, can bring in Rs.100,000 into the SBI Savings Fund. Investors make substantially larger allocations towards savings as compared to equity investments. Larger ticket sizes should make a retail effort in this direction an attractive business proposition.
WF: Despite buoyant market conditions, we aren't yet seeing any significant increase in the number of new ARN registrations. Is distribution getting consolidated into larger firms? What will it take for the industry to drive up new IFA registrations?
D P Singh: I think the key to distribution expansion is increasing investor demand. As more and more investors look towards capital markets and within that, towards mutual funds, there will be incremental supply of distributors that will be created. Supply comes in to satisfy demand.
At an industry level, we must continue our investor education efforts and our distributor engagement and support initiatives. Spread of awareness about mutual funds coupled with an improving macro picture, should get many more investors into mutual funds than what we have seen in the last few years.
Ideally, if AMCs had access to more capital, we could have seriously considered some really large distributor development initiatives that could have significantly increased distribution footprint in anticipation of demand. However, balance sheet remains a constraint in this business.
Having said that, there is a lot which we can do within the boundaries of what is possible and we are taking all steps to grow distribution particularly in smaller towns. Our sales teams in smaller towns for example, have been given specific targets to bring in new distributors into the system, in addition to their business targets. As I mentioned earlier, I firmly believe this financial year will mark a quantum jump in retail penetration, and one of the enablers of this will be distribution expansion.
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