The ADB report on the rise of the middle class in Asia Pacific has lot of valuable information for the financial institutions in India. It also indicates which sectors need regulatory help and which should be restrained and restricted. The comparison with China helps us in understanding the focus areas in financial services development in India, as many of the sectors were in a very similar state 20 years prior.
The most penetrated segment has been insurance. Regulated by Insurance Regulatory and Development Authority (IRDA), it has manifested as a sold good–distribution agents taking the lead to sell it in a FMCG manner. The high (as compared to other segments and geographies in the sector) means that motivation to sell certain products (ULIPs) has been very high. While it’s debatable whether or not these products will actually achieve the insurance goals of the buyer, there is no discussion on the penetration.
On an average, the adoption is around 65% in the Indian middle class. With the growth of the middle class, this is a key sector of growth. In sharp contrast, we can see the growth and penetration of other sectors, namely investment trusts and pensions.
As the old-age population is going to grow, key questions arise:
• Should pensions be sold like insurance products in India?
• If so, should it be expected from the insurance players to grow the pension market, especially in a context where the ULIP business is so lucrative?
How PFRDA handles this issue, as well as answer the question of increasing pension coverage in a not-so-highly financially literate population with a large unorganized sector, will determine the future of social security in India. Innovative use of traditional channels like the post office, tying up with non-governmental sector for awareness building, regulatory parity of commissions across various financial products and policy level changes are all important for this paradigm shift.
This blog has been reprinted with permission from Celent. Sreekrishna Sankar is an analyst based in Celent's India office.
Readers are encouraged to respond to Sreekrishna using the “Add Your Comments” box below. He also can be reached at ssankar@celent.com.
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