Investment banking

Ajay Piramal is just the sort of big fish every Indian private banker would love to land. With businesses from healthcare to glass and property, the 56-year old Piramal has a net worth of 1.4 billion US dollars, according to Forbes, good for 39th on its India rich list.

The problem, at least for the swelling ranks of wealth managers in India, according to Reuters, is that Piramal doesn't need them, putting his millions instead in his own companies and real estate ventures. "These are only two areas I invest in, and therefore we don't need an advisor," said Piramal, who is approached by private bankers "all the time."

India may be minting millionaires, but that is failing to translate to profits for the banks that have set up teams of well-dressed, well-paid bankers to help manage those riches. A narrow product range, rising competition, falling advisory fees and billions of dollars in wealth hidden from tax officials has stifled profits for private banks, which have aggressively ramped up operations in India.

Rising salaries

At the same time, expenses, mostly salaries, are growing by as much as 20 percent a year, some in the industry say, meaning many private banks must absorb potentially heavy running costs for years before they are profitable.

The industry's difficulties in India come as more established wealth management centers in Hong Kong, Singapore and elsewhere are buffeted by poor markets. The challenge is made greater by poor market performance, with Indian shares sliding about 17 percent this year. A spate of scandals embroiling the country's business and political elite has also soured sentiment among the rich. The tough conditions are exacting a toll, even as many banks such as Morgan Stanley, Royal Bank of Scotland, Barclays and Bank of America Merrill Lynch continue to add staff, with an eye on the long-term potential of the fast-growing economy.

Credit Suisse, one of the largest global private banks and a player in India since 2008, is cutting its India wealth management staff by 12 people, or 20 percent, as part of a global reduction, sources said last month. Credit Suisse is unlikely to be the last to trim staff over the medium term, industry players said.

Real estate and gold

A dearth of alternate investment vehicles such as hedge funds and private equity, a 200,000 US dollar cap on overseas investments by onshore Indians, and an underdeveloped corporate bond market means most investments are channeled into run-of-the-mill equity products, bank deposits, and government bonds. Investments in exotic assets such as art and wine are rare in India. Instead, the homegrown rich keep their money in real estate and gold, which doesn't require the services of polished bankers of the sort that cater to the rich in places like London, New York, Zurich and Singapore.

Many tycoons like Azim Premji, chairman of IT services exporter Wipro and the third richest person in India, with net worth estimated by Forbes at 16.8 billion US dollars, thus prefer to use in-house staff to manage personal wealth.

In neighboring China, wealth managers also contend with tight regulations and limited product offerings, but they also face less domestic competition. Many rich mainland Chinese invest in real estate or stash their wealth in Hong Kong or Singapore. Many of the richest Indians also have substantial wealth overseas and do their private banking in Singapore, Zurich, London or Dubai, where there are more investment options and where some banks cater specifically to non-resident Indians.

Private banks in India charge between zero and 0.5 percent advisory fees to wealthy clients, which barely covers costs for smaller players, compared to up to 2 percent in more developed markets, industry insiders say. Pressure on fees and rising costs have dragged down most wealth management firms' margins to 40 to 50 basis points now from one to two percent a few years back said.

Growing wealth

In 2010, the population of high net worth individuals – those with more than 1 million US dollars in investable assets – rose nearly 21 percent in India to 153,000, making it the 12th largest such market, ahead of Spain and just behind Brazil, according to a report by Capgemini and Merrill Lynch.

Yet a large chunk of Indian wealth goes undeclared. Tax authorities say billions of dollars in funds have been deposited by Indians in Swiss bank accounts and other tax havens. A government panel in 2009 found Indian illicit funds to range between 500 billion and 1.4 trillion US dollars, which is now nearly the size of India's economy. Global Financial Integrity, a Washington-based think-tank, estimated illicit outflows of about 16 billion dollars a year from 2002 to 2006.

Reuters
Editor: Sarah Berning