Nirmal Jain, chairman of financial services group India Infoline, talks about the challenges and opportunities for the brokerage sector, and his own plans, with Sheetal Agarwal. Edited excerpts:
Brokerages are seeing a hit on their volumes and yields. How will you manage this?
In the past two years, the market yield has been falling because typically in the cash market, we charge 20-25 basis points (bps) on delivery transactions and five bps on intraday transactions. But, in F&O (futures and options), our brokerage is sometimes as low as one to three bps. So, if the F&O volume rises significantly, our average brokerage will come down. That has been the trend for a long time.
I think the last quarter was perhaps one of the worst in the past six-seven years. This is part of the game, as the brokerage industry tends to be cyclical and this is the down cycle. Hopefully, things will reverse, as we have seen some recovery from June.
We are trying to move to an advisory platform rather than just focus on execution. So, our wealth management segment charges about one per cent as asset advisory fees. There, customers also tend to be sticky because there are multi-products and not equity alone. We also advise customers on fixed income, bullion and real estate investments. Thus, the way to meet the challenge is to move to advisory and move away from execution, which has become commoditised.
Most PMS (portfolio management services) players are seeing slowing returns. How is IIFL faring in this business?
Yes, PMS players are seeing slowing returns. The trend is to move towards non-discretionary assets. I think you have to look at increasing the size of the asset, especially non-equity ones. In the past two-three years, the markets have not been in the best of sentiment. So, people have lot of apprehension about equity investments and most PMS players are focused on equity and, therefore, the returns have slowed. IIFL is also fairly in-line with the market. We are not focusing as much on our own PMS and are offering our customers open architecture, so that we also advise them to invest in all the mutual funds and all the PMS schemes, even if they are not our own in-house, so we have kept our businesses independent.
What measures are required to boost retail participation in Indian markets? What are brokerages doing in this regard?
One positive step that Sebi has taken is to simplify the KYC (know-your-customer) process and the single signature for a trading account. Second, the margin funding scheme offered by exchanges has to be made more practical. It is so cumbersome in terms of reporting and monitoring, so no broker has been able to use it in a meaningful manner. Third, the STT (securities transaction tax), stamp duty and service charges together put a huge burden in terms of transaction costs and impact cost. That needs to be addressed because if you remove STT, the market volumes will go up, liquidity will rise, the impact cost or the bid-spread difference will narrow. Also, public offers lined up from the Government of India, which are well-priced, high quality companies, bring in a number of retail investors.
We are investing a huge amount of money and have a budget over 18-24 months of Rs 25 crore in financial literacy for retail investors.
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How will IIFL’s revenue mix change over the next three to five years? Which segment will be the key growth driver?
Wealth management and wealth advisory is a business we diversified into around two to three years before. That business’ revenue share will scale up in the next three to five years. Besides, our international markets business is in a very nascent stage of growth and should grow relatively faster than the local businesses. We are also looking at the debt market opportunity, which is not there in our product mix today, in a significant way. Unlike broking, which is a cyclical business, our businesses like NBFCs (non-bank financial companies) or financial product distribution are more steady.
IIFL’s net profit has fallen in the June quarter. What is the outlook for the rest of the financial year?
IIFL’s profit has fallen in the June quarter, primarily because the broking business was facing significant headwinds and interest costs had gone up significantly. We may see one more difficult quarter and things should recover in the second half. The first quarter is a slack one for insurance and other businesses seasonally. Second, as we move, we will see our new businesses scale up and contribute more to revenue, as well as profits.
