Ranjeet S. Mudholkar
INDIA'S financial sector has seen major changes over the past decade, with the banking, securities and insurance sectors becoming less clearly defined as banks began to move towards universal banking structures. These changes affect the way financial services are delivered. They have important implications for the players who deliver finance as well as the consumer, who has to manage his finances and goals in the new regime wherein high assured return will no long will be a possibility.
A wake-up call
The Union Budget 2005 is a wake-up call to get one's finances in order. Apart from the actual changes made in the Budget, there are several messages that it sends out to individuals, and understanding them will help meet future challenges.
One factor that will impact the planning of individuals in the near future is the move to the new method of taxation for savings. Under the EET (Exempt-Exempt-Taxed) method, contributions to savings will be exempt from tax and so will the earnings, but there will be a tax incidence at the time of withdrawal of the funds.
This factor may confuse because Indians are familiar with the EEE system of taxation. They are used to the fact that the amount invested out of savings are tax-free. As such, changing their mindset will require a major role for financial planners. It will be their role to clarify the current position and then explain the sequence of change in the future.
The belief currently among a large section of people is that the tax structure for investments has been changed and that the amount received at maturity on instruments such as PPF, NSC and bonds will now be taxed. This is not the case, because there has been no change as far as taxation of receipts in this Budget is concerned.
Globalisation and opening up of the financial sector, aided by consumption-driven growth in the Indian markets, have brought several world-class products and solutions to the doors of the Indian consumer.
Technology too, has played a positive role in development, and we are one of the most advanced users of technology platforms. The sophistication of the products being distributed is also high. However, in terms of the actual distribution of products, we are still in the Hunters' Age! We have to evolve, with active participation of all the stakeholders, viz. the Government, the regulators, the industry, the media, and the investors themselves.
Advisors vs sellers
With every financial services provider in the market wooing the investor, it is natural for the investor to raise the bar for service providers. Investors will increasingly attach importance to convenience, quality of services, level of engagement as well as choice of products and solutions. All these will require professionals who can deliver and manage consumer expectations.
Consumers need to differentiate between `advisors' and `sellers' as they can differentiate between doctors and chemists. Unfortunately in India, no financial regulator has a well-established distinction between the terms "advice" and "selling." Moreover, there should be a uniform licensing procedure for advisors, wherein advisors or planners or consultants should be accredited on fulfilling certain certification requirements that should develop a holistic approach to offering advice. They should meet the rigorous education, examination, experience and ethical requirements necessary to call themselves advisors or planners, as notified by the Regulator.
The Advisors should be regulated by a Code of Ethics and Rules for professional conduct by the Regulator directly, or by any other body/bodies as notified by the Regulator. The Advisor should have validity for prescribed period, and mandate Continuing Education for Re-Certification.
Enslaved to bank deposits
Let us consider savings in the country. Bank deposits recently crossed the record level of Rs 10-lakh crores. This may appear to be a reason to rejoice. However, it indicates a lack of alternative investment modes or lack of trust in these alternatives, enslaving small depositors to the banks. The real interest they get does not even cover the inflation-driven erosion of capital. Or does it communicate the saver's lack of trust in other instruments? With 50 per cent of this money finding its way to government securities, end-usage is also poor.
The market capitalisation of all the listed companies on the BSE has crossed Rs 15-lakh crore. Investments in mutual funds is around Rs 150,000 crore. These are the only savings which are manifested in the economy. If one takes account of the gold hoarded in each and every household, the cumulative wealth of the people will easily be more than Rs 70-lakh crore. Is it really such a momentous task to channel even a fraction of this wealth into development? Innovative ways of mobilising these resources is required. Financial Planning could be the answer.
Many financial services organisations have realised this fact and have initiated professional financial planning for their clients. This includes seeking right certification and suitable training for employees, evolving investor-friendly processes and establishing a redressal mechanism.
Professional financial planning is also opening up an opportunity to establish a new breed of professionals who could help people manage their life goals. This is a new career opportunity that thousands of candidates in the country are preparing for.
(The writer is CEO, Financial Planning Standards Board (FPSB), India.)