Mr. Mohammadali Saiyed

Mohammadali Saiyed is responsible for the Finance Function at NJ. He is a member of the ICAI and has an experience of nearly 9+ years at NJ.

Who has to register under GST?

The following persons are liable for registration under GST

  • Partners earning having pan-India total turnover / revenues in a financial year exceeding Rs.20 lakh

  • Partners having multiple places of business in different states /UT irrespective of the threshold limits

  • Partners previously registered under existing laws i.e. Service Tax etc.

  • Any person making an inter-state supply in any goods or services. No IGST will be applicable to NJ Wealth Partners as NJ has obtained registration in every state with NJ branch presence and where the partner is being serviced at.

While registration is mandatory for above persons, any person can opt for registering voluntarily under GST. However, every registered person would be required to pay GST and threshold of Rs.20 lakhs will not be available to such registered person.

* Note, the threshold is of Rs. 10 lakhs in case of special category states

If I am not liable to register, what will happen?

You are not liable to register if (a) your place of business is within one state /UT (b) the total turnover / revenues are below the threshold limits and (c) you are not already registered under Service Tax, etc. Under GST provisions, if unregistered person (you) provides service / goods to a Registered person (NJ), GST will be paid by such Registered person on Reverse Charge basis as the recipient of service / goods. Thus, NJ will be required to pay the applicable GST dues on your commissions under reverse charge mechanism. However, a person without GST registration can neither collect GST from his customers nor can claim any Input Tax Credit (ITC) of GST paid by him.

What should I do after GST registration?

After successful registration with GST, we urge you to provide your GSTN details to NJ on priority and get your self registered with NJ too for GST reimbursement. For this you need to provide details in the document format emailed to you along with self-attested copy of your GST Registration certificate / Application Reference Number (ARN) Acknowledgment received by you from GSTN portal and mail the same to This email address is being protected from spambots. You need JavaScript enabled to view it..

Once the same is done, you will be required to do the necessary compliance and returns filling exercise at your end. Further, you will also be required to make payment of GST dues as per the law. All rates with NJ will be exclusive of GST. Registered partners will be required to raise invoice to NJ post which the GST amount will be reimbursed. This is similar to existing service tax reimbursement process. Further, on his part for any other income or business expenses, the Partner should check with all manufacturers /vendors regarding the applicability of IGST and other GST provisions on the income he is receiving or expenses he is paying.

As a Partner, what will be my place of supply/business?

The place of supply for services provided by Partners would be the location of service recipient, which in our case will be NJ. GST requires that one premise in each state needs to be declared as principal place of business for that state. At NJ, we have identified specific branches in all states where we have presence as the principal place of supply / business for Partners of that state. This branch will be auto populated for Partner at the time of invoice generation.

How will GST impact my business revenues?

There won't be much of the impact except the marginal increase in rates as already service tax of 15% is applicable on commissions. The commission rates normally declared by us are exclusive rates which will not include the GST component. Let us see with the help of an example: (a) If you are not registered: If Rs.100 is your commission, you will receive Rs.100 from us and we will pay Rs.18 under reverse charge mechanism (b) If you are registered: If Rs.100 is your commission, you will receive Rs.100 from us and also the Rs.18 of GST after you raise the invoice. You will then need to pay Rs.18 GST. In either case, you will receive Rs.100 and Rs.18 will be paid on your service.

However, for registered persons, there will now be an added advantage of claiming Input Tax Credit (ITC) against the GST paid on goods & services used in business. For those not liable to register, will need to make a choice between

  1. getting registration and benefitting from ITC but following compliance or

  2. forget all about compliance and ITC on GST already paid for other goods & services used in business.

Please explain how would the Input Tax Credit (ITC) provisions work for my business?

The taxes you pay on input goods/services can be used as an ITC against output tax liabilities. ITC is available for legitimate business expenses like purchase of computers, laptops, office rent, software purchases, consultant fees, office supplies, etc. This is how the GST provisions will work in practice.

Assume a supplier S who supplies goods worth Rs 100 to a Partner P who is registered under GST.

  • If S is registered under GST, he would charge Rs.100+ GST (assuming @ 18%) in his invoice. P would take ITC of GST of Rs.18 if the credit is admissible and cost for him would remain Rs. 100. This is a convenient and smooth scenario.

  • If S is not registered under GST, he would charge only Rs.100 in his invoice. P will then be required to pay Rs.18 GST under reverse charge mechanism and take ITC of Rs.18. The cost to P will remain at Rs.100 but he will need to do certain additional compliances as per laws.

Now let us assume that the Partner P is not registered under GST. In such a case, NJ would have already paid GST in reverse charge mechanism.

  • If S is registered under GST, he would charge Rs.100+ GST (assuming @ 18%) in his invoice. P will not be able to take ITC of GST of Rs.18 and the actual cost to him will be Rs.118.

  • If S is not registered under GST, he will charge only Rs.100 in his invoice. P will not be required to do anything further and cost to P will be Rs.100. But he will not get any advantage of ITC against GST paid by NJ.

How will be the Input Tax Credit provisions be applied?

The above example was a simplistic example but in actual, the GST is made up of three different components...

1. Central GST (CGST), paid on all transactions, collected by the Central Government

2. State GST (SGST), paid on all transactions within a State, collected by the State Government and

3. Integrated GST (IGST), aid on all inter-state transactions, or import of goods into India, collected by the Central Government

Between these three components, the following are rules for setoff of credit...

  • CGST input tax credits can only be used to pay CGST and IGST

  • SGST input tax credits can only be used to pay SGST and IGST

  • IGST input tax credits can be used to pay IGST, CGST and SGST

How is NJ going to help Partners?

For the purpose of the GST laws, the Partner will be considered as a “supplier” (providing distribution services) to NJ India Invest Pvt. Ltd. who will be the “recipient”. NJ India Invest has obtained GST registration in every state where it has presence and has also designated a principal place of business in every state.

In terms of the facilities to be provided, NJ is developing a system wherein invoices can be generated from the system as is the current practice. This will make it very easy for Partners as the cumbersome process of preparing invoices can be avoided. We are also exploring ways to extend more services to Partners to ease more compliance responsibilities.

How is the transition to GST planned?

  • The brokerage for the month of June 2017 was processed before 30th June 2017 on provisional basis (i.e. considering your brokerage for the month of May 2017 paid in June) and also the invoice generated from Partner Desk will have the invoice date as 30th June 2017.

  • W.e.f. July 2017, the “Invoice Generation for Service Tax” utility on Partner Desk will have changes related to GST. We will separately communicate to you once the changes go live in this utility.

  • We recommend you to generate your entire pending Service Tax invoice and submit the same to NJ on or before 10th August 2017.

For any further information, please look out for our email communication for same. In case of any GST related issues, you can mail us on This email address is being protected from spambots. You need JavaScript enabled to view it.

GST is a historic, landmark and the biggest tax reform ever undertaken in India and probably in the entire world. It will take some time for all the systems and processes to settle down and all gaps to be filled up. As citizens of India, we must embrace the change and take this opportunity to not only accept it but also help, spread the awareness about it. At NJ, as always, we are committed to do whatever is required in the best interest of our Partners.

Mr. Abhishek Dubey, Head - Strategic Business Development Unit

Abhishek Dubey is the Head of Strategic Business Development Unit and part of NJ since last 10 years. Abhishek has played a key role in building the policy, process & system structures at NJ. He is the Chief Policy & Communications officer and also responsible for publications and the front-end - websites & on-line desks at NJ.

The Evolution:

The traditional financial advisory business is increasingly seeing reforms and innovations in virtually every aspect of business. Be it marketing, operations, customer servicing or even advisory processes, technology and digitisation has empowered advisors enormously. We see a trend where businesses are servicing much larger number of clients without geographical restraints, riding on the technology wave. Needless to say, this is one profession and industry which is at the front seat of change, and we are all proudly embracing the same.

Data: The New Buzz Word

One of the fantastic outcomes of greater use of technology and digitisation in our lives is data – something that big businesses absolutely love. The more we engage and interact using data, the more rich the data gets and thus there arises many ways and possibilities of using that data. This important customer data is now the focus point for every business and is actively being used to understand whats' going on, to know the strength & weaknesses, to make improvements and take actions to improve the bottom line. As companies grow and mature, the usage of data also evolves. Today it is being used to predict business, identify cross-sell and up-sell opportunities for different products, understand customer behaviour and so on. With all this change and data happening around, there is question for us – what are we doing?

Business Intelligence @ NJ:

At NJ, we are now looking at data as intelligence. Traditionally we have been using data in form of reports and MIS and we have been able to do that pretty well. We have also used data to automate processes to improve efficiency and save time & costs for our advisors and for our business. We have also gone a step ahead and used actionable data to send alerts and updates to concerned individuals – like for eg., sending you update on client birthdays with automated emailer in CRM or sharing a list of potential E-Wealth Account customers or automating insurance renewal reminders. We have been actively using data to support your business.

The bigger challenge for us now is making use of this data to increase your business and use it to also aid you in client advice. Frankly, we have been working on this for some time now but at a smaller scale due to some limitations of working manually on big data. The idea of identifying cross-selling and up-selling opportunities however remains our focus point going forward. Our efforts are directed to increase the Partners' business by identifying business opportunities in existing customers.

How we do it:

Just to highlight, in FY 2016-17, we did campaigns for ELSS & incremental SIP business and achieved success rate of 57% and 48% with respect to business amounts. Both the campaigns were run for a limited period of few months on limited number of clients.

Many would be wondering how we carry out these projects? Well, to begin with, it starts from capturing and getting data ready for our customers. Using advanced analytical methods, we then identify the most important factors which impact business. Using historical trends, we then predict the probability or likelihood of one buying a product and the target amount for every client. for eg., Rs.1,000 SIP target with 35% probability. We then block our universe with a minimum acceptable probability of say 50% for at least Rs.3,000 of SIP. Finally, we filter this universe for only Partners who have given consent for Business Intelligence activities.

Cross-Selling & Up-selling: An example for cross-selling would be about finding a person who hasn't invested in ELSS but there is data which suggests he is a probable customer for ELSS on basis of his tax status, age, income level, whether he is active customer or not, and so on. An example of up-selling would be like finding an existing equity MF investor, not having any SIP but is likely to start a new SIP on basis of data, as explained earlier.

Once we have a list of clients ready with us, we work on promoting our campaign idea using multiple modes of communication like email, SMS, Client Desk banner, voice blast, etc. The objective is to push the idea of say increasing SIP or buying ELSS in the minds of the customer so that he becomes aware of it or gets reminded or warms up to the idea. At this time he may directly approach the advisor for business or may be more open to any pitch/push from the advisor for same. He may also give his active interest to us on our campaigns which we then share as an opportunity in CRM and update our Partners. A campaign finally ends with us evaluating the success and business received from the universe.

To conduct these activities, NJ is actively working with an external consultant who are experts in applying intelligence to business analytics.

Why Business Analytics?

The conversion figures for last year projects are very impressive which simply suggests that the universe of potential customers we identified were very likely to purchase ELSS or increase SIP. Partners who would have actively worked on these leads / opportunities would have got better results, better conversion and productivity while saving time and costs. This is the primary advantage of working on a logical set of potential target universe based on data.

At NJ we believe many Partners would have a good understanding of a customer and would likely know of opportunities for more business from him. However, our effort is greatly augment or strengthen our Partners' capability with more actionable data on a bigger scale which can be used more productively. Data driven approach become much more feasible and advisable once you have a large number of customers and there are increasingly a large number of products and services in your advisory basket. Its a win-win scenario for both the advisor and the customer too as he gets reminded of a product /service that he likely needs. Data driven approach will also eliminate any personal bias and notions we may hold for any client and remind us of clients which we may have missed altogether or are not close enough.

Business analytics also presents an opportunity for a Partner to work in an organised manner. There is no need to promote every product or service to every customer. It would help you work in a more productive manner where one idea to pushed to a client who is ideally suited for it. It thus strengthens your advisory capabilities while saving precious time and costs in business.

Going forward:

Having proper, actionable and adequate data with historical and behavioural trends of customer is a challenge which we have worked a lot on. We are now becoming capable of working on multiple projects in different groups of customers simultaneously in a much easier and less time consuming manner. We have also worked on developing multiple communication channels too to reach out to clients, again saving time & costs on behalf of our Partners while ensuring quality outreach. With these things in place, we are now aiming to launch multiple campaigns this year. We intend to begin with SIP (renewal and stopped) and then work on ELSS and then other aspects of SIP like new & incremental SIP. We strongly believe that business analytics will gain prominence as an dependable friend to help grow your business in times to come.

Getting There...

At NJ, we are making all efforts on technology front to empower you and your business. We would love to see every Partner as capable as any other big business backed by our strong technology and support services. But our efforts would succeed only if you actively embrace the same and adopt them in your advisory practice. Your active participation will give the meaning and the ultimate form to our efforts. After all, our success is in your success and growth. Let me thus invite you to embrace whole heartedly one more important change for a better future.

Mr. Nikhil Shah

D.G.M. - Loan Portfolio – NJ Group

Mr. Nikhil has over 24 years of corporate experience in diverse areas of product development, marketing, product management, etc., and across industries like consumer appliances, insurance and real estate. He also has prior experience in reviving sick units and was a visiting faculty to management institutes. Nikhil joined NJ about nine months back and is responsible for developing the loan business at NJ. Nikhil is a BE in Industrial Engineering and is an MBA in Marketing.

Q] What is LAS and how does it work?
A] LAS stands for Loan Against Securities. As the name suggests, it is a loan which is offered against financial investments. Loan is sanctioned and disbursed against investments in stocks, Mutual Funds – Equity & Debt, RBI Bonds, LIC Policies and Corporate Bonds. Usually the banks have a pre-approved list of shares and mutual funds, which they accept as a collateral.

The process for availing the loan is very simple for applicants and there is minimum documentation required. The securities are pledged and withdrawal limit is set against the same. The sanction amount is a percentage of the securities pledged. The client can operate the loan as an over draft account and can withdraw the money as per his requirements. Interest is charged usually on a daily basis for the amount drawn from the bank. In LAS, interest is thus charged only on the fund utilized and the borrower can repay the loan anytime and often there are no foreclosure charges.

Q] Why LAS should be a preferred source of funds?
A] LAS is an ideal source of funds especially if you have investments and the need is for short term loans. It is a boon for the investor as he can get funds without liquidating his investments. In addition to the pledged securities, no other guarantee is required. There is also minimum documentation required and often only details of securities are asked for in addition to the basic verification documents. The processing fee for LAS is also very reasonable and the sanction is given very fast, usually within a TAT of 7-10 days.

The client alsobenefits as he does not need to redeem his investment for short term fund requirements. The rate of interest on such loans is also very reasonable, especially when compared with personal loans. Another benefit is that LAS is often given in the form of over-draft facility and the interest is charged only on the amount you withdraw and for the period you withdraw. Thus, your actual cost of funds can effectively be much lower as your investments continue to deliver market returns.

We believe that LAS is an ideal solution for any investor needing funds for variety of reasons like for emergencies, family events, business working capital, purchase of goods and so on.

Q] What are the types of opportunities available to an advisor in the home loan space?
A] Home loans can be seen as an umbrella product area. Within home loans category, we can broadly identify three types of opportunities or solutions:

  1. New home loans:
    This is the most common among all. A person is likely to buy a home multiple times in his life span for various reasons.
  2. Transfer of home loan balance:
    With interest rates being on a downward cycle, there is an opportunity for transferring client's existing loan to another lender at a lower rate. A large number of our investors or their children having existing home loan can be interested in this solution.
  3. Loan against property:
    This is an option similar to LAS wherein the loan can be taken against property when required.

We all can understand the opportunity which the new home loan business offers to us. I would like to highlight the opportunity which transfer of home loans offers to us. There is very high probability that a lot of your clients or their family members would have taken home loans at higher interest rates than what is currently offered in the market. The lower rates prevalent today offers a greater chance for you to intervene and offer better deals in the client's own interest. This is a great way to further deepen your client relationship and get additional business /wallet share of client.

Q] Why is home loans an important advice area for a financial advisor?
The home loan industry in India is growing between 18% - 22% p.a. We believe that with major trust on affordable housing in India and the PM's vision of a home for everyone by 2022, the demand will continue to grow going ahead.

Apart from the previously mentioned different types of opportunities within the home loan space, there is an opportunity for repeat business in new home loans alone. Every investor today is likely to purchase at least 3 to 5 properties in his life time for any of the following reasons...

  1. First home for personal use at a younger age
  2. Second or a bigger home for a growing family
  3. Home for children
  4. Holiday home for leisure
  5. Home as a real estate investment for long term appreciation and rental income

Needless to say, the overall home loan space presents a tremendous opportunity for our channel Partners and can be seen as a must have solution in their advisory basket.

Q] What role can an advisor be expected to play in the loan space?
A financial advisor is responsible for the overall financial well-being of the client. The loan space is a high-value, low-volume segment where an advisor can provide immense value to the client and indeed his/her entire family. A Partner can act both as an advisor and a facilitator for loan products.

Firstly, an advisor can suggest which type of loan would be most appropriate for a client given his requirements and profile. For eg., an advisor can suggest a client to not sell his investments but rather go for LAS to meet his short term fund needs.

Secondly, an advisor can help research and filter the best deal by a Bank/NBFC within a loan product category for the client. Today, the market is very competitive but the client may not get to know the best deals available and often he relies solely on his banking relationship.

Thirdly, the advisor can help coordinate and manage operational processes on behalf of the clients and give them some relief. This facilitation will be greatly appreciated as often a lot of time and visits are required to be made before funds are disbursed.

Lastly, even after a loan a taken, the advisor's role will continue and he can always help him reset/revise the interest (interest rate) the customer is paying so as to save the client's money.

Q] What are the plans of NJ Wealth on the loan product vertical? At NJ Wealth, the aim is to always empower the Partner with client oriented products and services. Loan is a product vertical being currently very actively researched and attempts are on finding a way to design a proper business model for Partners. Within the loan vertical, we are primarily focusing on two products to begin with as has been already mentioned. They are …

  1. Loan Against Securities
  2. Home Loans (includes all 3 types of loan business)

We have already completed some tie-ups and are in the process of further expansion. We have also test launched these products at select branches to study the market. We are very happy to report that we have received tremendous response, both from Partners and their clients.

At NJ it's our endeavor is to always be on developing strong processes for ease of transactions, backed by good research and a very strong technology platform/support. An online portal for LAS is about to be launched beginning the next financial year.

 

Mr. Vinay Baraiya Zonal Manager – NJ Sales.

Vinay Baraiya has a rich experience of over 18 years in the industry and with NJ. He holds a Bachelors Degree in Technology and is an MBA in finance. Presently he is working as a Zonal Manager with NJ & looking after Central Gujarat & Rajasthan. In this interview, Vinay has shared his learnings and experience in dealing with HNI clients.

Q. What are the key qualities or personality traits, an advisor should have to appeal to the HNI clientèle?
Vinay: Professional and social skills along with knowledge, all come into play to make you stand out in the eyes of your premium / HNI clients. As far as knowledge is concerned, an advisor should have have an in-depth understanding about his own and other competing products, asset classes, markets and to a some extent, the economy too. And that is not all. The advisor should also be familiar with the client's profile and his needs. As far as skills are concerned, having strong communication skills, good etiquettes, proper grooming & dressing adds. One should also be tech-savvy as some clients prefer that. Lastly, nothing will work if you are not confident, disciplined and prompt while handling clients. So all in all, one should try and present himself as a complete package and that is the real challenge.

Q. What are the must have's or products and services that an advisor should be ready with for offering to the HNI clients?
Vinay: For an advisor, I am always in favour of having a strong and wide suite of products and asset classes as the starting point of business. One should have a decent bouquet of products like mutual funds, bonds, insurance, PMS and real estate initially. Gradually he can then think of moving on to equities, NPS and other structured products. As far as advisory services are concerned, comprehensive financial planning should be seen as a basic service. The advisor should attempt to go beyond it by providing basic legal and taxation services too, which can be done by tying up with subject matter experts to guide the client.

Q. What are the advantages and challenges of focusing primarily on the HNI clientèle?
Vinay: Targeting any particular client segment has its own advantages and disadvantages and a Partner's focus should be first clearly identified and then pursued according to his/her strengths. As far as HNI clients are concerned, the key advantages are big ticket size, opportunity to get good references, rapid growth of your AUM and less hard work as the client base will be low. On the other hand, there are challenges faced as well in acquiring clients, retaining clients and gaining their trust. Sometimes, one has to persevere and follow up a lot before the client opens up with you. On an ongoing basis, you have to be at your best when it comes to service standards, adjusting to and managing client expectations and lastly to provide the right or the best possible advise to them in all market conditions. The biggest concern however is the risk of loosing an HNI client having a sizable percentage of your business which can hurt you a lot financially.

Q. What are the important things required to retain and grow an HNI relationship?
Vinay: As already discussed, managing expectations and maintaining good quality of advisory and service standards is a must. Beyond that an advisor also needs to have some special qualities to grow a relationship – Ethics, Competence and Trust. An advisor must be client centric with complete focus on client's wealth creation & preservation only. Do not try to sell products which are not suitable or those which you do not have full conviction in. It would be advisable that instead of looking at markets and getting carried away, you should be disciplined in focusing on and sticking to asset allocation as discussed with the client. You also need to be proactive in making investment recommendations as and when opportunities show up, i.e. at the right time, and for accomplishing this, one has to stay updated with all happenings in the industry, in domestic and in global markets. Coming back to basics, one should always be ready with client portfolio details like valuation, P&L, dividend history, ST/LT/gain/loss statements, FMP maturity and so on, and should keep them handy whenever you are meeting or discussing investments with clients.

Q. How do you advice handling / servicing a demanding HNI client?
Vinay: I will stick to the basics here. I believe an advisor should be disciplined and regular in whatever service standards he defines for clients – both as a group as well as on one-to-one basis, depending on the value he attaches to the relationships. Having client details ready and handy whenever you are meeting clients is a very basic thing to do. In addition, you should define and follow a strong communication practice/strategy. All important alerts and developments – both on the client portfolio front and on the external market / economy news front, should be communicated in time to the clients.

Q. Please share any ideas / tips for managing quality service standards and relationships with HNI clients
Vinay: I have already shared a few important points. Beyond that, I believe that one has to act and behave in a professional manner with all clients, not just HNI, where it is most desirable. One should also have good relationship skills. Having a strong technology platform, a dedicated RM as well as a CRO helps a lot. One can also look at updating his clients by doing personnel/telephonic or virtual meetings with market experts or fund managers. Doing periodical portfolio reviews of clients, say once in six months, proper recording of all minutes of all the meetings with clients, never promising any unrealistic returns, focusing on solutions and not on products, etc., are few other points to keep in mind.

Q. How can an advisor decide whether to focus on HNI or retail clients or a mix of both in his clientèle base?
Vinay: As I have already said, an advisor has to identify his/her individual strengths. If an advisor has the qualities and skills as mentioned earlier, then definitely, HNI client segment can be targeted. But, I personally believe that retail clients cannot be ignored as they are the bread and butter for advisors. One should be insulated enough against the risk of loosing his HNI clients resulting in breakdown of his AUM. It is thus always advisable to keep a mix of both in your clientèle.

Q. Are there any effective marketing or promotional activity ideas for acquiring HNI clients or leads?
Vinay: Well when it comes to HNI clients, frankly you are not alone in the hunt. It is best that you let your work do the maximum talking. It is no surprise that referencing is the easiest and the fastest route for acquiring HNI clients as they prefer to work in circles and contacts. Beyond referencing one can explore participating in business fairs, being active in HNI circles like clubs, societies, trusts, etc., participating /sponsoring in special events like NRI meets, HNI client meets and so on. Coming back to basics, one should be acquainted with proper marketing literature and must have his resources in place like website, social media profiles, printed brochures, etc.

Wednesday, December 28, 2016, Contributed By: Team NJ Publications

Mr. Abhishek Dubey, Head - Strategic Business Development Unit

Abhishek Dubey is the Head of Strategic Business Development Unit and part of NJ since last 10 years. Abhishek has played a key role in building the policy, process & system structures at NJ. He is the Chief Policy & Communications officer and also responsible for publications and the front-end - websites & on-line desks at NJ.

A lot has been talked about demonetisation over the past 50 days. Virtually every person has an opinion and his own economic analysis on the same. This piece however spares you from another economic commentary and instead just focuses on one thing which we all are really concerned about – financial savings.

Many of us presumptuously feel that that financial savings, including mutual fund investments, will increase going forward. But many amongst us would also be at odds to explain the reasons for same, from where the money would come and what is the size of the potential opportunity in front of us? To answer these questions, we need to step back and look closely at the bigger picture. We can see that many different streams of seemingly independently working factors will increasingly deepen the flow of money towards financial savings. Broadly, these can be classified into two main streams.

1. Movements /adjustments within financial assets

2. New inflows into financial assets from black economy

A] Movements within Financial Assets:

1. Currency Holdings:

Demonetisation has clearly hurt something which we Indians love – cash. I would love to share an interesting insight – cash holdings of Indians (as percentage of financial assets of households) has been rising steadily over past few years while on the other hand the bank deposits have fallen more alarmingly. Today the currency share stands at over 13% which is over double that of entire in shares & debentures, including mutual funds at ~6%.

Having a large portion of holdings in cash is in nobody's best interests. With demonetisation, we can safely assume that a large part of earlier holdings in Rs.500 & 1000 notes, comprising of estimated 84% of all currency holdings, will stay in the banking systems for some time. Even after remonetisation, cash holdings will not rise as much as they have fallen and most probably cash holdings will not see a double digit % share ever again. This is assuming Indian's will gradually adopt digital payment modes in their day-to-day lives.

2. Bank Holdings:

Banks have been flush with cash after demonetisation. Typically, any bank prefers to hold more money in CASA (Current Account & Savings Account) as the interest liability is less there compared to term deposits. But with too much of it, sooner or later, banks have to channelise or at least manage the inflow deluge in a productive manner to ensure the it does not hurt profitability. This puts a downward pressure on all interest rates in the banking system.

Prior to demonetisation, an estimated ~18% of our financial assets were into CASA accounts and about ~23% was into term deposits. With demonetisation, the share of ~41% bank holdings will likely increase to the extend the demonetised currency is not withdrawn from banks. With higher liquidity, banks will likely lower interest rates, especially for term deposits reducing interest income for investors. Also, it is unwise to not to believe that investors will continue holding a disproportionately large portfolio in bank holdings without diversification or for better returns in market linked products.

3. Non-Cash & Bank Holdings:

As of now, 45% of financial assets are into non-cash and non-banking financial assets like life insurance funds, pension funds, shares, debentures, etc. If we remove shares & debentures at ~6%, we are left with less that ~39% approximately of financial assets having non-market linked returns.

Lower inflation levels and a secular downtrend in interest rates over the years have seen the interest rates offered by small saving schemes also falling. Government has been bold enough to bring reforms in deciding these interest rates which are now more dynamic and they no longer enjoy the protection from political generosity and sensitivity. With lower interest rates, products like pension funds, life insurance funds, etc. will also find it hard to deliver attractive post tax returns to investors. Surely, a large part of funds coming into the formal channel will make way into such products but it would be increasingly difficult to satisfy the investors with higher post tax interest rates going forward. As it looks today, the interest rates will fall and never rise again to the present rates in foreseeable future.

B] New Inflows :

1. Black Economy:

The definition of black money can be simply put as money which has been hidden from taxation. Many figures have been thrown around by many people about the size of the black economy but no one knows for sure. The shadow economy may be anything from 25-45% of the GDP which is the normal range for developing economies. As measures against black money gain traction, a good shift towards formal economy will happen and to that extend, the economic indicators including GDP will rise going forward.

To the credit of the government, demonetisation has clearly left an impression in our minds that it will be increasingly difficult to generate, store and use black money. With rising popularity and usage of digital payment modes, already business books have started getting white. With GST being set to launch from next year, businesses will be again forced to readjust and integrate with the formal economy.

Going forward, even if 5-10% of the black economy changes its colour every year, we would have a big part of our economy moving into banking and taxation channels. Guesstimates suggest that these figures can be huge and we can potentially have an additional ~0.50% of GDP being saved into financial assets every year.

2. Tax Net:

In a country of over 125 crore people, only 3.65 crore file their returns with less than 25 lakh people declaring annual income over Rs.10 lakh. Surprisingly every year over 25 lakh cars are sold in India where average holding period is about 5-7 years. The extent of tax evasion sounds astounding in India where the general mindset of any person was to first to avoid taxes.

The reasons for this can be many but today we can see the government shifty moving towards bringing more people into tax net. Today buying of anything expensive leaves behind a trail which can be pursued later by tax authorities. The Benami property legislation is one step in this direction which is set to make a big impact soon. The government is shown its intent to lower taxes, remove exemptions and bring ease in taxation matters and it can be safely assumed that this intent will only strengthen in coming days. As more and more money and people fall into tax net, it is obvious that they would seek products offering tax advantages as the avenues to hide money like real estate, gold, etc., will loose their charm.

3. Economic Growth:

The final big picture is of the economic growth of India which we all are well aware of. With big trends like contracting black economy, greater tax compliance, GST, lower inflation, lower interest rates, greater government spending and rising consumption power, we can safely assume that the economic growth will be sustained and perhaps will even reach outer orbits of 8-9% growth. The obvious impact will be on corporate profitability and continued inflows into capital markets driven by rising incomes of country with very favorable demographics. Perhaps no better script for growth of markets exists anywhere else in the world.

4. Nascent MF Industry:

In the end, lets just look at the MF industry size. A simple statistic of MF Industry AUM to GDP ratio clearly places us at the nascent stage of evolution compared to other big economies. The industry AUM comprises ~80% of the US economy and with India at ~7%, it looks like the story is yet to begin here. All the reasons that we have argued for greater financial savings, especially in market linked products, will help fill this void. Even if we target reaching half way at say 40% of GDP in say 10 years hence, the industry can potentially multiply by 11 times by what it is today!

The figures are mind boggling but are drenched in logic and probably in line with the market forces. But to ride this wave, we will have to adopt and embrace technology as never before. The change will happen but it cannot really reach its full potential until we become fully ready and geared up to take advantage of the market upheavals. Only when we are in position to reach and to service any customer without any physical boundaries, can we multiply scale and volumes. The least we can target today is 10x of our own AUM in 10 years just by staying active in the industry. But for those who believe, sky can be the limit. May the force be with you! On second thoughts, it is with you already...

 

More Articles ...

  1. Possible to have 1,500 Crores AUM in 20 years by Financial Planning of 400 families
  2. NJ Realty – A Source of Wealth Creation in Real Estate Sector !!
  3. Leveraging Technology to March Ahead !!
  4. Look Beyond Mutual Fund. Don't put all your eggs in one basket !!
Back to Top
e-wealth-reg
e-wealth-reg